As a small business owner, healthcare may be a big question mark for you. A traditional health insurance plan can be expensive. But your kid needs braces, and you have a couple of prescriptions. You travel internationally once a year — what if something happens? Do you just pay out of pocket?
A Health Spending Account (HSA) or Private Health Services Plan (PHSP) might make sense. We’ll talk about all of your options and then dig into why HSAs are great for small business owners.
- OPTION 1: Get no insurance, pay out of pocket and opt for the Medical Expense Tax Credit (METC). You’ll have to crunch some numbers to figure out exactly what you get with the METC. In general, this option favours lower income earners with high medical expenses.
- OPTION 2: A traditional health insurance plan. Remember those full-time job days when Nordic spa massages were covered? As nice as it is to participate in one of these plans, they’re pricey if you’re the one providing them. Factors like pre-existing conditions and how much your employees use your plan will also make your costs go up.
- OPTION 3: Health spending accounts (HSA). Health spending accounts (HSA) allow the employer to pay the employees (including the business owner) tax-free money to cover medical expenses. HSAs can be a cost-effective way for small businesses to provide health and dental benefits. Olympia Benefits provides some of the best HSA plans in Canada — so we sat down with them to learn more.
HSA Benefit 1: Save money by eliminating income tax on your medical expenses.
Imagine you have a two-person (husband and wife) corporation that nets $100,000 a year. (Note: You must be paid wages and receive a T4 from your corporation to qualify for an HSA.)
With an HSA, your corporation reimburses you for personal medical expenses. The reimbursements are 100% tax free to you and 100% tax deductible for your company. Basically, you get to withdraw money from your company without having to pay income tax.
Here’s an example from Olympia Benefits showing the savings between medical expenses paid personally vs through your business using a Health Spending Account:
(The below chart references a resident of Ontario.)
On the 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, you must withdraw $5,340 from your company. $2,340 or approximately 43% (of $5,340) is lost to income tax.
On the right (green), instead of paying the government 43% tax, you pay Olympia an annual HSA membership fee of $499. Your company saves almost $2,000 in taxes with an HSA!
If you want to run the numbers for your specific scenario, check out Olympia’s HSA Savings Calculator.
HSA Benefit 2: Just pay the annual fee.
Once you decide on the right plan for you, you pay one annual fee, period. There’s no premium. No deductible. It doesn’t matter if you have a pre-existing condition.
A single owner of a small business can can make up to $15,000 in claims annually. For a two owner small business (for example, spouses), a combined $30,000 can be claimed on a shared-basis for the whole family. If you don't use it, $499 (or less) is all you pay.
HSA Benefit 3: It’s easy to use.
Here’s how you’d make a claim for the $3,000 medical expense outline above:
Step 1 - Pay for the $3,000 medical expense on your personal credit card.
Step 2 – Log in to your HSA account and submit the details of your receipt online. You hold onto the original.
Step 3 - Your corporation pays Olympia Benefits the $3,000. This is a business expense and is tax-deductible.
Step 4 - Olympia reimburses you personally for your original personal expense. A direct deposit of $3,000 will be made to your personal bank account. This is tax free.
What if I have arm’s length employees?
A group HSA works really well for companies with anywhere from 1 to 50 employees. As the employer, you get to choose your employees’ annual allowance. You only pay if an employee makes a claim. And the money goes right to your employees expenses — not to a premium. Employees know how much they get and can spend it however they need to.
Health Spending Accounts won't work in these cases:
- Sole proprietors
- Business owners who pay themselves in only dividends will not be eligible
If you want to learn more, check out Olympia’s 53 FAQs about HSAs. Alden Hui (403-668-1845) is Olympia’s resident expert and is happy to answer your questions. If you want to see how this fits into your tax planning, feel free to reach out to us!
Read more about Small Business Basics topics that may be helpful to you and your small business.