What is a Private Health Services Plan (PHSP) and how does it work?

In simple terms, a Private Health Services Plan (PHSP) allows an employer to provide tax-free benefits to employees to be used on medical expenses. Both an incorporated business with or without employees is able to sign up. 

Today, the term Private Health Services Plan (PHSP) is often referred to a Health Spending Account (HSA) or vice versa. The two terms are interchangeable.

On first glance, the plan seems complex because of its tax and insurance concepts. But it's actually simple to use upon further reading. 

What is a Private Health Services Plan (PHSP)?

A Private Health Services Plan (also known as a PHSP) is an alternative to traditional health insurance. Used by thousands of small business owners across Canada, a PHSP 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.

For entrepreneurs and self employed professionals, this is an effective tool to cut your taxes and reduce your medical costs. The ability to write off health and dental expenses can create savings of more than 30% on medical and dental related expenses

For a company with many employees, a PHSP becomes a means for attracting and retaining talent due to its unique properties. All benefits within a PHSP are 100% tax free to employees.  The main attractions are cost control to the employer and flexibility for employees.

Who can use a Private Health Services Plan (PHSP)?

You are suitable for a PHSP if you:

1. Own an incorporated business
2. Pay medical bills
3. Receive T4 income or have employees who you pay salary to

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 PHSP works differently based on your company structure (business with arm’s length employees vs. with no arm’s length employees).

How does a PHSP work for an incorporated one person business?

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.

A PHSP will save you money in three ways:

1. Tax savings from deducting 100% of your medical costs
2. Reducing your costs by avoiding high premiums associated with traditional health insurance
3. The elimination of expensive deductibles
   

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 from your business account, you must withdraw $5,340 from your company because $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 / PHSP membership fee of $499. Your company saves almost $2,000 in (marginal income) taxes with a PHSP / HSA!

Why use a PHSP as a one person business?

A one person business typically consists of incorporated consultants and contractors, and professional corporations with or without a spouse. This segment of Canada's business community is overlooked by traditional health insurance carriers as it is difficult and expensive to insure. 

The majority of Olympia clients are part of the segment above. By using a PHSP, you and your family would benefit from a 100% tax deduction for all your medical benefits.

For the average family in Canada, the annual medical expenses can easily amount to $3000. A typical, healthy, family may only need to have a visit to the dentist for each family member, a pair of glasses, and a few prescription drugs to reach that amount. Depending on your personal tax rate and province of residence, your savings with a PHSP can range from about $500 to over $2,000.

Here's some of the advantages of a PHSP for an owner/operator/one person business:

• Deduct 100% of your family's medical expenses
• Reduce your business and personal taxes
• Get comprehensive medical coverage of all the routine expenses with few limits
• Pay less than you do today in premiums for an insured health and dental coverage
• Supplement plans held by a spouse who is employed outside your business

How does a PHSP work for a business with arm’s length employees?

*see arm's length definition

A PHSP makes for a great employee benefits package. These plans provide flexibility because employees can choose how, when, and where to spend their 100% tax free benefits through the plan. Expenses include medical events like chiropractor, massage therapy, naturopathy, physiotherapy, podiatrist, dental, vision and occasional prescription drug etc. On the other hand, the employer gets to choose how much and to who they designate these benefits to. Employers only pay when a claim is made, there are no premiums, and the employer can customize a plan to suit their needs. This saves the business money and helps in retaining loyal employees.

Why use a PHSP as a business with arm’s length employees?

• 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 PHSP / 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

What medical expenses are covered by a PHSP?

One of the great benefits of a PHSP is the freedom it provides through an extensive range of eligible expenses. With this plan, you are able to claim 100% of your medical expenses. The full list of eligible expenses includes qualified medical practitioners, procedures, and medical devices, making a PHSP an attractive choice for any small business owner.

Unlike typical health insurance plans, a PHSP has no premiums, restrictions, or deductibles. 

Best of all, a Private Health Services Plan can work in conjunction with a health insurance plan (if you or a spouse chooses to keep insurance) Premiums contributed to health insurance and expenses not reimbursed by the insurance plan are both eligible expenses in a PHSP.   

In short, a PHSP covers many popular and expensive medical expenses such as prescription drugs, massage therapy, hearing aids, prescriptions glasses, physiotherapy and more. 

Besides the standard list below, some medical expenses are eligible on a case by case basis. If the service or product is a medical requirement, then ask for a doctor's note and in most cases, you will qualify for the claim. 

The list of eligible expenses are determined by the CRA. Any medical expense that can be claimed on your taxes through vehicles like the Medical Expense Tax Credit, will also be qualified for a PHSP. 

How does a PHSP compare to traditional health insurance?

There are several advantages of a PHSP compared to a traditional health insurance plan. For health insurance coverage, members typically face recurring premiums, lack of expense eligibility, restrictive policies, high deductibles, and slow claims process. These can be avoided inside a health care plan like the PHSP. Furthermore, understanding the difference between insurance and administration events is critical when deciding on how to pay for your medical expenses. 

Can I self administer a PHSP?

It is not wise to self administer a PHSP because of the time and resource commitment required. A similar example is how one can choose to represent themselves in court but is not advised to do so. 

Strict guidelines and conditions are required to qualify a PHSP and ongoing knowledge is required to properly adjudicate claims.  In exchange for a small fee to a provider, you can be worry free that your PHSP qualifies with CRA and focus your time on your business and more important matters.  

Does a PHSP comply with Canada Revenue Agency (CRA)?

Yes -  Private Health Services Plans are legal in Canada - as long as the guidelines are properly adhered to. To properly satisfy the conditions set forth by CRA, make sure you choose a reputable provider and understand what you are purchasing.

Key Takeaway for a Small Business

In many cases, a Private Health Services Plan (or also referred to as a HSA / 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!

Download a FREE Guide on the Olympia HSA / PHSP to learn more:

Own a business with arm's length employees? Download this guide instead:

Related Reading:

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

An Explanation of Health Spending Account Taxes by Province

Common Misconceptions about HSA Costs