Many independent consultants in Canada mistakenly think traditional health insurance is their only option to pay the medical bills that provincial medicare programs don’t cover.
Thankfully there is a revolutionary alternative to traditional medical insurance for independent consultants.
Protecting yourself against the high cost of medical and dental expenses not covered by provincial medicare programs can initially seem to be a daunting, complicated task for consultants. However, there are actually only three options of health insurance benefits for independent consultants and other small businesses: you can pick up an insurance plan, pay for medical bills on your own, or use a Health Spending Account.
Let's take a closer look at these three options.
1. Traditional Health Insurance
Traditional health insurance benefits for independent consultants is probably a familiar option. You pay a monthly premium to an insurance company in exchange for health and dental coverage. Typically, the insurance company will earn a margin of approximately 40% on your premiums meaning for every $1,000 in premium you will receive $600 in benefit. In some cases, it can reach as high 65%.
Did you know that many of the events "insured" under a tradtional health insurance plan are actually nothing more than administrative events that don't require insurance? You are essentially paying a 40% markup for a planned, administrative event. It makes sense to insure your home against a fire (an unplanned event). But does it make sense to buy dental insurance when you plan on visiting the dentist twice in the upcoming year? Not to mention the majority of major expenses are paid for by you, out of pocket anyways.
On top of being expensive (deductibles, out of pocket expenses, premium creep), traditional health insurance is riddled with exclusions for pre-existing conditions, complicated claim procedures, and waiting periods.
Considering the expensive and restrictive nature of traditional health insurance, indpendent consultants in Canada often elect to self-insure and pay for their medical expenses out-of-pocket. While this can certainly prove more cost-effective than a traditional insurance plan, the cost of paying for medical bills with after-tax dollars can be onerous.
Take a look at the total cost of a $1,000 out-of-pocket medical expense to your small business. Assuming you live in Ontario, earn $100,000 per year, and have a marginal tax rate of 43%, the total cost to your business for a $1,000 medical bill is $1,750. In other words, you would need to earn $1,750 to pay for a $1,000 medical bill because an additional 43% ($750) is required to pay income tax. Often, people don't associate taxes to the true cost of an after tax expense, but at the end of the year, $1,000 is going to cost your business $1,750.
3. Health Spending Account
Enter the third option. By using a Health Spending Account (HSA) as an independent consultant, you acknowledge several critical facts with health insurance. The first is that there is no rational sense in purchasing insurance for a planned event. You understand the majority of listed expenses under a health insurance plan are administrative and planned events. Paying a 40% premium on these events does not make sense.
Second, you realize that exceptional and unplanned events (laser eye surgery, orthodontics, MRI) are for the most part poorly covered by a traditional health insurance plan AND the majority of the cost will come out of your own pocket.
Third, you see that paying for medical expenses of out-of-pocket is not cost-effective because you are paying a substantial amount of income tax on these expenses.
Fourth, you understand the cost associated with a catastrophic and life threatening accident will be covered in large part by your provincial plan.
Given that traditional health insurance is expensive and paying for out-of-pocket expenses in not cost-effective, the optimal, revolutionary solution is to pay for medical expenses through your company with a Health Spending Account.
A Health Spending Account is one of Canada's best kept secrets for independent consultants and other small business owners: it converts out-of-pocket, after-tax medical expenses, into a before-tax business expense.
HSA pricing is typically a small annual fee to your administrator or a small administration fee on the amount of your claims. Simply put, a Health Spending Account provides a greater degree of cost control, flexibility, and ease of use.
Are you an incorporated consultant in Canada? Discover how the Olympia Health Spending Account can provide significant tax savings by downloading our free guide: The Beginner's Guide to Health Spending Accounts.