As a small business owner in Canada looking for a cost efficient health and dental insurance plan, a Private Health Services Plan (PHSP) is a viable option. Thousands of self employed business owners have been using this plan to reduce the cost of their out of pocket medical expenses.
Here are the key guidelines for setting up a Private Health Services Plan (PHSP) in Canada.
Although straightforward to use, the product does require proper explanation and understanding before it is adopted by any particular small business. A PHSP directly involves matters of taxation and ultimately business owners need to understand the guidelines for setting up a Private Health Services Plan.
What is a PHSP?
A PHSP or Health Spending Account (HSA) is a tax vehicle for a business owner to effectively reduce the cost of their medical expenses by paying for them with pretax dollars.
A PHSP is derived from Section 248(1) of the Income Tax Act (the Act) and Interpretation Bulletin IT-339R2.
Assuming the definition of a PHSP is met, a PHSP enables an employer to reimburse an employee (including shareholder/employees) for eligible medical expenses on a tax-free basis while deducting these expenses.
Medical benefits paid on behalf of an employee by an employer are not taxable as a benefit to the employee; nor are the claim benefits themselves taxable to the individual employee.
Specific PHSP Guidelines
To qualify, a PHSP must include a minimum set of conditions:
- The PHSP is in the nature of insurance.
- The employer is under legal obligation to fund the spending account for each employee
- All employees in a particular classification must be offered equivalent benefit levels.
- Employees not forego any amount to which he/she would otherwise be entitled in order to obtain the increased benefit (IE: a salary decrease to accommodate for enrollment in the PHSP).
- In order to provide for the necessity of an element of risk, all reimbursement credits must be claimed in the year in which they are incurred or within 12 months of the plan year.
- Eligibility is maintained with respect to medical expenses, employees, and dependents.
- No allowance is made for cash payments in respect of unused reimbursement credits.
PHSP Guidelines for Backdating
IT Bulletin 339-R2 discusses the meaning of PHSP and states that a PHSP can take a number of forms but regardless of form it must be “a plan in the nature of insurance”. In this respect, the plan must contain the following basic elements:
- An undertaking by one person (or entity)
- To indemnify another person (or entity)
- For an agreed consideration (some form of compensation, such as a premium)
- From a loss in respect of an event
- The happening of which is uncertain
A PHSP, or any “insurance“ plan that offers an employee health benefits must show, at a bare minimum, the following:
- An employer-employee relationship (this can be established by the acts within a contract). This necessity is clearly expressed in the Income Tax Act.
- A plan in the nature of insurance.
If a happening (an event) is uncertain, then one can insure against that event. An obvious example is home insurance, where a contract must be in place to insure a home before the event. This is obvious to all and follows all the elements stated above. Once a house has been damaged it cannot be insured for that damage.
It may be less obvious when considering a PHSP, but as with home insurance, claiming a loss before a contract is in place between the employer and an employee contravenes point 5 above and would render the contract invalid.
Looking for more? Here's the top 15 FAQ for a PHSP in Canada.
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