Health care spending accounts help business owners save on medical costs by turning after-tax personal medical expenses into a before tax business expense. By utilizing tax principles for cost-savings, this plan is a smart and efficient option for the modern day entrepreneur.
Background of Health Care Spending Accounts
Canadians have coverage for most medical expenses thanks to public healthcare. For things that fall through the cracks like vision and dental, many resort to private health insurance. However, health insurance is rarely affordable or beneficial for a small business owner. As a result, CRA created the health care spending account to minimize this gap in coverage. A company like Olympia Benefits is an administrator of these HCSA plans and ensures everything is done properly.
What is a Health Care Spending Account (HCSA)?
A health care 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. Through a simple claims process, the small business owner can save thousands or more.
Who is a Health Care Spending Account for?
You are suitable for a health care spending account if you:
- Own a business
- Pay medical bills
- 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 can differ in some ways based on your company structure (business with arm’s length employees vs. with no arm’s length employees).
How does a health care spending account work?
Health care spending accounts work for the entire business including the employer (owner) and the full time employees. If the business has arm's length employees (besides the owner and spouse), then the employer will have to pre fund the account with a set amount at the start of each month. This ensures that employees will be reimbursed for their claims in a timely manner.
On the other hand, when there are no employees besides the owner, the employer does not have to pre-fund and can simply pay Olympia from their business account after making the claim.
Let's look at the claims process for a business with no arm's length employees (no pre funding required):
- Pay for your medical expense using a personal banking account. (Ex. $1,000 to the dentist)
- Make an online claim with Olympia (enter your expense details, submit the claim)
- Make a payment from your corporation to Olympia for the amount of your expense. (Pay the administrator $1,000 from your business account)
- Olympia (administrator) reimburses your personal banking account for the original expense ($1,000 tax free)
The payment from your corporation to the administrator is 100% tax deductible. The reimbursement you receive from the administrator is 100% tax free.
Why choose a health care spending account?
The plan allows the business owner to withdraw money directly from their company account to pay for personal medical expenses... bypassing the need to pay income tax.
Besides the money saved, there are also great incentives for any potential employees working for the company. Health care spending accounts allow employees to choose how, when, and where to spend their 100% tax free funds.
The employer gets to choose how much and to who they designate these funds.
At the end of the day...
A health care spending account (or also referred to as a HSA) are used by many small companies and self-employed business owners (contractors, consultants) in Canada. Instead of paying monthly premiums, you simply eliminate the income tax on medical expenses for yourself (the owner) and your employees. Talk about cost efficient savings!
Find out how much you could save with our Health Spending Account (HSA) Calculator
Next Steps: Read the Complete Guide to Olympia Health Spending Accounts
Download this guide if you are a self employed business owner:
Download this guide if you are a small business with arm's length employees:
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