As a Canadian contractor, you can arrange for private insurance to pay for medical bills that provincial medicare programs don't cover.
However, it's often an unpleasant surprise to find that private insurance plans do not cover most medical services and that premiums often increase dramatically each year.
In fact, there are many Canadian contractors out there who mistakenly think private health insurance is their only option to pay for health and dental expenses. However, some experienced Canadian contractors have discovered a cost-effective, flexible solution to this challenge.
A Health Spending Account (or HSA) is a great way to write off medical expenses through your business. No matter how good a health and dental plan is, there are always certain costs that are not covered. With an HSA you will be able to transfer all eligible medical expenses to the company and have this benefit TAX FREE!
The structure of many HSAs is very low cost, with only a one time start up fee and (at times) minimal administrative fees, but no monthly premiums. This means a small business, like a Canadian contractor, can deduct health expenses without an elaborate and expensive health insurance plan.
The Difference Between Health Insurance and an HSA
A Health Spending Account is a method of covering health expenses as a business expense to a predetermined dollar amount each year. You can forecast and budget your health expenses into the future with certainty.
Health insurance, on the other hand, distributes the risk of events over all plan holders, so monthly premiums must be charged to all plan holders whether a claim is made or not. Insurance plans also vary significantly in the level of coverage you receive. More comprehensive plans have more coverage and have fewer restrictions, but are also more expensive. The more risk that is covered by the insurance companies, the higher the cost.
In addition to claims costs, insurance companies also charge for assuming plan “risk”, administration fees, sales fees and profits. These are built into the insurance premiums you pay. The insurance company determines your health premiums each year. And the only way you can reduce costs is to reduce your coverage.
Conversely, with an HSA, the coverage is very comprehensive and allows more choices of eligible services. Furthermore, you pay for only what you use when you use it, so there are no monthly premiums!
An HSA Example
Let’s say, as a Canadian contractor, you put $3,000 into a Health Spending Account for 2016. If you had a $1,000 medical bill, you would try and deduct the $1,000 medical bill from your 2016 tax return — but you would not meet the minimum threshold for the medical tax credit, so there’s no benefit in this case.
On the other hand, with a Health Spending Account, this $1,000 can be paid with "pre-tax" dollars, saving the individual approximately $600 (depending on their marginal tax rate).
If you're an incorporated Canadian contractor and without a Health Spending Account, it is time to investigate this matter further: you will save yourself thousands!