The world of health benefits for small business is quite new to me. I joined Olympia Benefits Inc. in the summertime and have spent the first few months navigating the murky waters of Health Spending Accounts (HSA's), personal and corporate taxation, and insurance to understand how they all correlate and interact specifically with small businesses in Canada. It didn't take long for me to become convinced that HSA’s are the best kept secret for small business health benefits, and here is why...
Preface to the article
Early in my integration into the financial industry, I wanted to identify and share my epiphanies, the ‘ah ha’ moments if you will, about HSA's. This type of account is a remarkably simple solution that is linked to the complex relationships that an incorporated company has with taxation, and health benefits. In Canada, HSA's have emerged as an alternative to traditional health insurance, providing small business owners with a cost-controlled option to offer employee health benefits. An HSA is essentially a tax-plan that converts medical expenses into pre-tax expenditures using the vehicle of employee benefits.
As I explore the realm of options for small business owners to offer health benefits, I have a sneaking suspicion that I am not alone in the discovery phase when it comes to HSA's and how they work to alleviate financial pressures.
If you own a small business, you know full well that you are not just an [insert specialty here- roofer, engineer, designer, publicist, doctor, or ice-cream maker…] but you are a marketer, a relationship manager, a finance person, a director, an HR resource… you wear many hats for your company and have braved the wilderness of independence and entrepreneurship.
Over the past 20 years, Olympia became the market leader for administrating HSA's in Canada. With the experience of processing over one million claims, we have developed a reliable and consistent platform for our clients. Now, let's dive into how this all works...
My Top 5 'Ah ha' Moments for Group Health Spending Accounts
#1. Understanding the landscape – What does Provincial Healthcare Cover
In Canada, each Province provides a level of health insurance that covers us from catastrophic financial risk due to a medical condition or event. Provincial Healthcare pays for visits to the doctor, diagnostic testing, treatment, surgery, and medical care for life-threatening or accidental injuries.
The following expenses are not covered by Provincial Healthcare and fundamentally define the scope of what we need to pay for:
- Vision care
- Dental care
- Prescription drugs
- Ambulance services
- Independent living (home care)
- Paramedical (massage therapy, acupuncture, chiropractic, physiotherapy)
#2. There are three ways to pay for Medical & Dental Expenses in Canada (this relates to the expenses we just discussed, everything that is not covered by Provincial Health Care)
- Traditional Insurance — a policy is sold to you by an agent, and charges a premium that you pay whether or not you use the plan, if you look at the cost you paid on drugs and services (for example: the 20% co-pay and the expenses that exceeded allowable limits), plus your total premium for the year, the total cost will likely be in the ballpark of 30-40% more than the amount of the drugs and services if you paid for them out-of-pocket without a plan… this shoe fits when a large company is paying for a large pool of employees and the utilization rate is low… the higher the utilization rate of the plan, the higher the premium… insurance companies put limits and restrictions on plans to keep utilization low, there are a number of expenses they will not cover, and they make up for any losses by charging premiums, that is how they make money.
- Out-of-Pocket — on average, a healthy Canadian will spend approx. $900 a year on medical expenses for some prescriptions and paramedical practitioners i.e. massage. Paying for these expenses out-of-pocket is still cheaper than if you have traditional insurance, and if you have high medical expenses, you can still submit your medical expenses through income tax under the Medical Expense Tax Credit (this gives you a percentage of your expenses back after you have spent $2300, it’s not much but it’s better than nothing. The amount of the tax credit varies based on your marginal tax rate).
- Health Spending Account — this is not insurance like most people initially think, it is technically a tax plan. An HSA essentially converts your medical expenses into a pre-tax event… an incorporated company can pay for personal medical expenses as a business expense when it offers an HSA as an employee benefit. The HSA makes the expense 100% tax free for the employee, and 100% tax deductible for the business from the first dollar spent. Because it’s a tax plan, it doesn’t have the restrictions that traditional insurance does, instead it complies with the Canadian Revenue Agency guidelines and classifies any expense that is eligible for the Medical Expense Tax Credit as an acceptable expense.
*Pro-Tip: There is only one reason why you should ever insure something— to protect yourself from a loss or event that would be financially catastrophic.
#3. HSA’s are a win-win scenario for small businesses and their employees.
An HSA guarantees cost control for the business and flexible easy to use benefits for the employee.
- Classifications — When you set up a Group HSA, you can customize the plan by creating classifications and then determine an allocated benefit limit for each one. You can base classifications on: job titles (i.e. director, manager, account rep), years of service, percentage of earnings, etc., or however your business is organizationally set-up.
- Rollover or Forfeit of unused funds — If an employee does not use their full limit for the year, the employer can choose to carryover that limit to the next calendar year or reset the amount (employee forfeits what they do not use). This is determined when the plan is set-up. *The company never loses unused money that they have allocated to an employee, the forfeit option only restricts the employee from using a carryover amount in the following year.
- Optional Insurance Products — Olympia’s optional insurance plans were designed to complement the Olympia Health Spending Account. These insurance products cover unexpected emergency medical costs while in your home province or while travelling abroad.
- There are NO Premiums with an HSA and you can customize it to work within your budget.
- Set Benefit Limits— you can allocate a different dollar amount for each employee classification you have created.
- All funds allocated to the HSA (including administration and account set-up fees) are 100% tax deductible for the business.
Benefits for the Employee:
- Flexibility based on employee's specific needs. The employee chooses how and where they want to spend the funds in their account on eligible expenses. Unlike insurance, HSA's do not have co-payments or limits per visit etc., as long as the expense is an eligible medical expense, the employee can decide how they want to spend their HSA funds.
- This is also a tax-free benefit for the employee.
- Eligible expenses: there are over 124 eligible medical expenses. All expenses eligible under the CRA expenses and guidelines for the Medical Expense Tax Credit can be administered through an HSA.
*Pro-Tip: If your employees feel that traditional insurance is the option they would like instead, they can use the HSA amount that you allocated to them to go towards covering premiums for a traditional insurance policy!
#4. The whole before tax dollar/after tax dollar thing (This was a double rainbow moment for me)
Do you ever clench your teeth at tax time and feel a piece of your soul die when you realize how much money you pay? Of course there are societal benefits to paying taxes but when you see a substantial part of your hard earned income chip off, never to be tangibly seen again, it’s a hard pill to swallow. Back in 1988, the Canada Revenue Agency first introduced Health Spending Accounts, also known as the Private Health Services Plan (PHSP) as an alternative to traditional insurance plans for Canada’s small business community.
What this means is that medical expenses could now be paid with before-tax dollars. Your savings will depend on your marginal tax rate, and can be substantial, especially if your medical expenses are high.
If you don’t have an HSA, you are paying for medical expenses with after-tax dollars which means that if your marginal tax rate is 43%, for every $1 of medical expense, a gross income of $1.75 is required. $0.75 (43%) is tax.
#5. Submitting your medical expenses through an HSA is not the same as submitting them through your income tax
You can claim medical expenses you’ve paid for yourself, your spouse, or common-law partner and certain related persons (any dependents who are listed on your income tax forms) on your income tax using the Medical Expense Tax Credit. Here is how this works:
- Total eligible medical expenses must first be reduced by 3% of your net income or $2,268 (2018), whichever is less (you will only receive a tax credit on the amount of expenses that exceed this number). The tax credit on the amount remaining is dependent to your provincial and federal marginal tax rate. You can calculate your approximate credit here.
An HSA works very differently in that there is no minimum amount of medical expenses you have to pay for before they become tax-free, once you submit your qualified expenses through an HSA they become 100% tax-deductible to the business and 100% non-taxable for the employee, from the first dollar up to the account limit.