For over a decade, I have been helping small business owners find an affordable and comprehensive way to pay for their medical expenses. By small business, I mean an owner / operator corporation or a business with one or two arm’s length employees. This article will explore what you should consider for health insurance when you own a small business in Canada.
For incorporated professionals, contractors, and consultants
NOTE: This section is for a one-person business or a two person business where the second employee is your spouse.
1. What options do I have for health and dental coverage?
You have three options to pay for your medical expenses:
Option I. Traditional health and dental insurance
You pay a monthly or quarterly premium in exchange for coverage. Quite often this option results in a feeling of “not enough coverage for what I’m paying for”. There are many exclusions, especially with dental and vision. Insurance can be complex, costly, and restrictive. Many times, a business of this size (two employees) will not even qualify for an insurance plan.
Option II. No insurance / paying for expenses out-of-pocket
Many small business owners don’t have health insurance because it’s too expensive and the coverage is poor. This means they have no plan and they pay for their medical expenses “out of pocket”. Don’t feel bad if your in this situation – it’s actually more cost effective than having insurance.
Option III. Health Spending Account (HSA)
The Health Spending Account (HSA) is a great health insurance alternative for this type of "family business". It is a tool that allows you to pay for 100% of your medical expenses through your business as opposed to paying for them personally. This means you and your business get to save a lot of money on taxes.
2. What exactly is an HSA?
At the core, the HSA is a contract between your corporation and yourself. The contract is based on CRA guidelines that allow your corporation to reimburse you for out-of pocket medical expenses. The reimbursements are 100% tax free to you and 100% tax deductible for your company. Basically, you get to withdraw money from your company without having to pay income tax.
3. Do I qualify?
You qualify for an HSA if you own a corporation, pay income tax, and have medical expenses.
Health insurance for small business with 2 employees (or more)
NOTE: This section is for a small business with arm's length employees
A viable choice for this type of business is also the HSA.
The HSA will have a few differences compared to the "family" business described above. Due to the tax planning nature of an HSA, the fundamental way it operates changes when the corporate structure changes. This makes sense as now you are looking for a solution from two perspectives - that of the owner and that of the employee. Important issues here are cost control, plan design, and what's covered. Think of an HSA under this pretense as an employee benefit plan.
With an HSA, there are no premiums. The employer decides how much is available to put into a benefit plan. Benefits are based on budgets and what the employer would like to provide in the way of benefits for themselves and their employees. A HSA can be thought of as a bucket of money provided by the employer to the employees. The employees use their individual benefits bucket to claim all their health and dental bills, up to their benefit bucket limit, set by the employer.
The employer is also included and makes use of the plan the same way, assigning their own benefit bucket limit. Claim reimbursements paid out of the benefit buckets to employees are tax-free. The payout to the employee is a pre-tax expense for the employer. The employer does not pay anything until the employee claims from their benefit bucket. This makes a HSA easy to understand, with all of the benefit available when and where it's needed by the employee and their dependents.