Small business tax accountants help you spend less time on financials and more time on your business. They take care of a company's finances, ranging from corporate structure to health and dental expenses. Accountant client relationships are built on trust, knowing that the accountant is working to the best of their ability. However, not all small business tax accountants are created the same. Like anything else in life, there will always be the good, the bad, and the downright ugly.
One big red flag is pushing a small business to purchase health insurance. There is a CRA-approved alternative called a Health Spending Account, specifically built to help small business owners manage their personal medical expenses. No small business owner should have to pay for their medical expenses with after-tax dollars.
What's wrong with recommending health insurance for a small business?
It is easy to point out the downfalls of health insurance, but to keep thing concise, let's identify 3 main problems:
1. Private health insurance is not needed for planned, non-catastrophic events
An example of a planned, non-catastrophic event is your routine dental appointment. This is a planned event because we schedule our teeth cleaning about 1-2 times a year. It is non-catastrophic because there is no severe risk involved. The majority of health and dental costs typically fall under this category.
Why is insurance not needed for these events? Let’s look at the definition of insurance. The purpose of insurance is to transfer individual risk away, into a collective pool. This will nullify the risk. Insurance works by paying a fee to an insurer, which keeps you within the collective pool.
Back to our example: there is little risk involved with a routine dental checkup. It is planned ahead of time. There is no need to insure low risk, non-catastrophic, planned events. You are better off paying the costs upfront.
You might ask whether there are other forms of insurance that are useful. The answer is yes. Other types of insurance can be effective and necessary, such as car insurance or home insurance. In the low probability event that your house burns down, you will be covered. This insurance helps you nullify the financial consequences.
Let’s cover all sides of the argument. Some people may have unplanned tooth decay. There are still 2 reasons why health insurance is not necessary.
1. It is a non-catastrophic event, so there’s no need to transfer away the risk
2. Most insurers will not cover this procedure anyway. There are plan limits.
2. Private health insurance brings no value in exchange for its cost.
Over the years, insurance companies have marketed their plans over mainstream media, to encourage generation over generation that a health insurance plan is necessary. This is not true. In most cases, you will save more money by paying for your medical costs upfront (out of pocket). There are more effective ways to save (we’ll talk about this in the last section).
Most insurance companies aim for a 60/40 split. This means that insurance only returns about $0.60 for every $1.00 in a premium paid, to the employees for their claimed health and dental benefits. The resulting $0.40 of each dollar paid in a premium covers costs to administer the plan. In other words, profit for the insurer.
3. Private health insurance has limited plan flexibility
A company's workforce has differing needs and values based on age, culture, and demographic. Benefits should be flexible. Most insurance plans comes with limited coverage, few eligible expenses, and many restrictions. When one employee claims more than the others, the collective group suffers from increasing premiums so that insurers can maintain the aforementioned 60/40 loss ratio.
What should small Business Tax Accountants recommend?
Health Spending Accounts are in demand within Canada’s small business community. Viewed as a viable and cost effective alternative to traditional health insurance. A Health Spending Account allows a small business owner to reduce their tax burden when paying for their medical costs.
There are 2 scenarios for a Health Spending Account:
Scenario 1: One Person Small Business Owner / Incorporated Contractor
Your client is a small business owner / incorporated contractor working by themselves or with a spouse. In this scenario, they can use a Health Spending Account to pay for their medical expenses with before-tax dollars. Essentially, they can pay for their medical costs through their company account by using a Health Spending Account. That can create savings of up to 50% depending on their personal income tax rate. A Health Spending Account allows you to eliminate tax on any eligible medical expenses.
Examples of common claims are braces, prescription sunglasses, dental work, prescription drugs, massage therapy, and even private insurance premiums and uncovered insurance claims.
Health Spending Accounts are CRA-approved tax solutions for a small business or family business. Don’t forget, dependants qualify for this plan too.
Scenario 2: Businesses with more than one employee
A Health Spending Account can also work for a business with more than one employee, such as an incorporated business with 20 employees. In this scenario, it is best to think of the Health Spending Account as an employee benefit. Health Spending Accounts are a simple way to eliminate taxes on your personal medical expenses as seen above. But what happens when you have employees in your small business helping you? Things can get a little complex because of the tax nature of a Health Spending Account.
In this scenario, a Health Spending Account allows the business owner to allocate tax free funds to their employees to spend on medical expenses. If a small business owner were to directly pay an employee $1000 to get sunglasses, they would only receive a percentage of that $1000 because of income tax. With a Health Spending Account, the employee can receive the full $1000 amount to spend on the sunglasses. Health Spending Accounts are a tax free benefit for your employees.
Allocated dollars are a business deduction for your company.
A Health Spending Account equals cost control and employee flexibility.
This plan is not insurance. It is an alternative to insurance. There are no premiums because it is a self-funded plan, meaning the small business owner provides the money in a HSA account, which then reimburses employees with tax free dollars. Employers can designate employees with different spending limits based on their employee classification (ex. VP, associate, manager, part time).
In a traditional insurance plan, the company pays premiums (which cannot be returned if employees do not claim in a given year) and the insurance provider reimburses employees with limited coverage. From what I said, I hope you can see that a HSA equals cost control for employers!
Note: Health Spending Account works differently based on the small business structure because of its inherent tax plan design. At Olympia, we structure the two scenarios into 3 different products to make it easier for customers to understand.
When does a small business owner qualify for a HSA?
- Pay income tax
- Pay medical bills
- Own an incorporated business
Learn more about Health Spending Accounts: