Private Health Service Plans (“PHSPs”) have been around for a number of years, yet people are still unaware of the great tax savings and potential benefits that these plans offer.
The Government of Canada initially recognized a serious problem whereby many self-employed individuals and small business owners could not afford to provide health benefits to their employees or even their own family members. Since then, the Government of Canada has introduced incentives in the form of tax deductions to enable small to mid-sized business owners to sign-up for PHSPs. These plans allow business owners to provide their families, employees and any dependents, with health and dental benefits at a fraction of the cost of your typical benefits plan. Business owners gain the ability to convert their family’s personal health and dental expenses into tax deductible expenses for the business, resulting in significant savings in the form of tax dollars.
The following is an example of the tax savings achieved by a self-employed individual, Johnny Cashman. Let’s assume Johnny is in the 40% tax bracket and had incurred $2,000 in family medical expenses in the year. Without a PHSP, Johnny could not claim any of these expenditures to reduce his taxes (the Medical Expense Tax Credit only applies to medical expenses in excess of $2,000). However, if Johnny signed up for a PHSP, he would be able to claim all of his $2,000 in medical expenses against his income to reduce his taxes by $800 (40% x $2,000). While most PHSP carriers charge an administration fee on any claims submitted, this amount is nominal when compared to the tax savings made available through these plans. Please note the administration fee is also tax deductible.
When comparing your options for benefits plans, there are a number of factors that you should take into consideration. Primarily, one must consider the coverage that is being provided and the cost at which it is being provided at.
Coverage. Most benefit providers are fairly limited in the type of coverage that they offer, particularly when looking at a basic benefits plans. My previous benefits package provided through an insurance carrier limited my annual claims to $500 for massages, $1,000 for dental work and nothing for eyeglasses or contact lenses. PHSPs do not impose such limits or restrictions on their plans making them a more flexible alternative. Rather, PHSPs allow you to deduct anything that qualifies as an eligible medical expense which is defined by the Canada Revenue Agency on their website.
While PHSPs often cover more items than a typical benefits package, they do not include long-term disability or travel insurance.
Cost. Even the most basic health and dental benefits plans can get fairly expensive when you are paying for them out of your own pocket. While some do provide quite extensive coverage, you should ask yourself whether the coverage provided will exceed the cost of the annual premiums associated with each plan. More often than not, this is not the case. Insurance premiums are not cheap and unless you’re working for a company that is paying them for you, there may be better options available to you.
PHSPs are a cost effective alternative to your typical benefits plans as there are no annual premiums and you only pay an administration fee when you actually incur an expense. This works really well from a cash-flow perspective as many PHSP providers allow you to fund these accounts on a pay-as-you-go basis. Thus, if you had no expenses to claim in the year, then you would have no expense relating to your coverage for the year either.
Furthermore, corporations that cannot afford a regular health plan can usually work directly with PHSP providers to create customized plans that fit their budget. This can help small business owners control their costs while keeping competitive by providing benefit plans to their valued employees.
While the coverage and cost will likely be the determining factors to base your decision, there are a number of other factors that you should also take into consideration:
Flexibility – Coverage. Benefit plans can get complex in nature. Nonetheless a good benefits plan will provide flexibility in determining the amount of coverage included and the types of expenditures that qualify for reimbursement. As previously discussed, most benefit plans through an insurance carrier are limited in terms of how flexible their plans really are, whereas most PHSP providers work within your budget and provide coverage tailored to your needs.
Flexibility – Claim period. Insurance plans typically limit your claims period to begin from the start date of your plan whereas PHSPs may provide more flexibility in this respect. Most PHSPs will allow you to claim an expense so long as it was incurred within any 12 month period ending within the businesses fiscal year. This flexibility may allow you to claim an expenditure that was already incurred prior to setting up your PHSP.
While the needs of every person will certainly differ, PHSPs are perfect for self-employed individuals who do not have a benefits plan or small corporations that wish to provide coverage to their employees and/or family members, without having to fork-up the hefty bill associated with a benefits package.
There are a few good PHSP providers across the country. Since we have found out about this tax savings strategy, we have setup a number of our clients with Atlantic Benefits Plan and we have had nothing less than a great experience working with them thus far. As always, feel free to drop me an email if you have any questions regarding the content of this article.
Junaid Usmani is the Tax Partner at SRJ Financial Chartered Accountants in Toronto, Ontario. He has a Masters in Taxation and a wealth of experience from the top accounting firms across the country.