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How does a Health Spending Account work for small business in Canada?

Posted by Alden Hui on May 24, 2018
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A Health Spending Account is an affordable way for Canadian small business owners to minimize their medical expense costs.

As a CRA-compliant plan with tax planning and medical insurance concepts, it is helpful for the typical small business owner and its employees to understand how it works. Continue reading if you are looking for a brief breakdown on the question, "How does a Health Spending Account work for small business".


What is a Health Spending Account?

A Health Spending Account (HSA) is often referred to as a Health Care Spending Account (HCSA) or Private Health Services Plan (PHSP). These names are used interchangeably and usually mean one and the same thing. For ease of reading, I will refer to these plans as a Health Spending Account (or HSA) for the rest of the article.

A Health Spending Account is a cost-effective way to provide health and dental benefits to employees. In simple terms, health and dental benefits offered through this plan are fully tax deductible to the business and received 100% tax free by the employees. There are no premiums, hidden fees, deductibles, copay, or complex policies.


Who can use a Health Spending Account?

You are suitable for a Health Spending Account if you:

  1. Own a business
  2. Pay medical bills
  3. Pay income tax / receive T4 income

While these plans offer health and dental coverage, it is important to understand that they operate based on principles of tax planning. As a result, a Health Spending Account works differently based on your company structure (business with arm’s length employees vs. with no arm’s length employees).

How does a Health Spending Account work?

Business with 1 or more arm’s length employees:

*see arm's length definition

A Health Spending Account makes for a great employee benefits package. They provide flexibility because employees can choose how, when, and where to spend their 100% tax free allowance through the plan. On the other hand, the employer gets to choose how much and to who they designate these allowances to. This saves the business money and helps in retaining loyal employees.

Here are some more reasons an HSA makes a great addition to your employee benefits plan:

  • It transfers the value from the employer directly to the employee, instead of losing money to a premium or deductible
  • It is easy to understand and use:
    • The employer funds the plan with a set monthly amount of their choice
    • Employees pay for their medical expense personally
    • Afterward, employees make a claim on the medical expense and get reimbursed tax free, using funds from the employer funding account
    • The medical expenses are a tax deductible / business expense for the employer
  • Funds not used by the employee are returned to the employer. 
  • The value of a HSA is never lost in an insurance premium
  • There’s no expense for the employer until a claim is made by the employee for an eligible medical bill
  • When the employee claims, they’re reimbursed directly for 100% of the claim, tax-free, up to their benefit allowance
  • The employee can claim all their health and dental bills as needed. They pick what medical treatments matter to them

Download our FREE Complete Guide to HSA to learn how to use the plan for your employee benefits


Business with NO arm’s length employees:

*see arm's length definition

A Health Spending Account turns your after-tax personal medical expenses into before-tax business deductibles (through your business).

Basically, the owner gets to withdraw money directly from their company account to pay for their personal medical expenses... bypassing the need to pay income tax.

In this circumstance, it is easiest to understand the cost-savings of a HSA by a case study:


Case Study - Single person incorporated business

As a business owner, you receive income from your corporation. In Canada, we have a progressive tax structure. Meaning the more income you make, the more the government takes. Your marginal income tax rate will have a significant effect on the total cost of your medical expenses. Your marginal tax rate is the combination of your provincial and federal tax rate.

For example: if you earn $100,000 in Alberta, you would have to gross roughly $1.78 to bring home $1.00 after-tax. $0.78 of your gross $1.78 (or 43%) would be taxed, leaving you with $1.00 after-tax.

 

Tax_flow_health_spending_account

 

Below is an example of a savings comparison between medical expenses paid personally vs. through your business using a Health Spending Account

Please note that below chart references a resident of Ontario.

 

Health_Spending_Account_Savings_Comparison

On the bottom left (red), you see the true cost to your company when you pay for a $3,000 medical expense personally with after-tax dollars. To get $3,000 you must withdraw $5,340 from your company. $2,340 or approximately 43% (of $5,340) is lost to income tax.

On the bottom right (green), instead of paying the government 43% tax, you pay Olympia an annual HSA membership fee of $499. Your company saves almost $2,000 in (marginal income) taxes with an HSA!

Key Takeaway for a Small Business

In many cases, a Health Spending Account (or also referred to as a PHSP / HCSA) will be used by small companies and self-employed business owners (contractors, consultants). Instead of paying monthly premiums, you simply eliminate the income tax on medical expenses for yourself (the owner) and your employees. Talk about savings!


Find out your HSA savings with our Health Spending Account (HSA) Calculator



Next Steps: Get the Complete Guide to Health Spending Accounts

Download this guide if you are a self employed business owner: 

Olympia Complete Guide HSA Walkthrough 2018 Eligible expenses

Download this guide if you are a small business with arm's length employees: 

Group Health Spending Account Canada Walkthrough 2018

 

Topics: health spending account