Health Spending Accounts Applied And In Action
In my last article, I introduced the Health Spending Account (HSA) as a unique and simple tool for corporations of 1-through-10,001-and greater employees to either augment or define the foundation of their health benefits plan, using tax-preferred funds. In this issue, we’ll dive deeper into unique planning strategies for business owners to help identify the most efficient plan structure to suit their needs.
According to a Fraser Institute study, 673,000 Canadian firms employ between 1 to 4 employees. A further 226,000 firms employ between 5 and 9 employees.1 In total, firms with fewer than 10 employees represent some 73.8% of businesses in Canada. Fully 40% of these firms offer HSAs to their employees. While this is a significant portion of the market, it indicates there are still several incorporated individuals and micro-sized firms that are not utilizing the HSA as a significant tax and health benefits management tool.
There may be several reasons for this, including a lack of awareness or access, for which there is an obvious solution (Please reach out). But there may be other considerations at hand, such as a misunderstanding of how much money is required to set up an HSA or even the default reliance on accepting the health benefits plans provided by a working spouse. It seems reasonable to expect that start-up founders might be reluctant to spend their critical cash when their spouse's plan may be seen as “good enough”.
What if it’s not? What happens when the company has established a level of success that can support something greater? Here is where I’m going to break the metaphoric fourth wall and speak from personal experience.
To be fair, my situation may be different in whole, or in part, from yours and as I mentioned in my last article, you must consult with your tax professional to be sure an HSA is appropriate for your situation.
For us, my wife retired 10 years ago with a full defined benefit pension and a robust retiree health benefits plan. As can be expected, the change in my work situation caused us to be careful when considering an additional benefits plan. It was all we could do to fund my wife’s plan, which featured 80% of co-insurance. Her plan represented a level of funding and coverage most Canadians don’t have today. As my business grew, though, it became apparent we could afford more.
The important thing to consider is that an individually incorporated business is entitled to the same tax-advantaged cost structure as any business, regardless of size. That means there are certain benefits that can be paid pre-tax. There are some differences in the tax treatment of benefit expenses depending on the type of benefit. For example, Group Life Insurance can be secured as a tax-deductible expense to the business, where other benefits, such as Long-Term Disability (LTD) Insurance, may trigger taxes on the income received, depending on who’s paying the bill.
Back to our situation. In our case, the premium for my wife’s benefit plan was deemed to have been an allowable business expense for employees of the firm, and we ran the cost of the eligible healthcare costs through the company account as a tax-deductible expense. In the future, we’ll spend more time explaining how we can apply this concept to an even greater level to secure an enhanced level of healthcare for us to enjoy as employee/owner.
Let’s now consider a situation where there is no working spouse (married or common law) and you find yourself having to provide for your healthcare in its entirety.
In this case, and for all the reasons we shared in my last article, it would be a great idea to start small and set up a Health Spending Account. Fund the account with what you can afford: perhaps $2,000 - $3,000. Find a service provider who can process your claims in a timely fashion and keep you compliant with Canada Revenue Agency (CRA) guidelines. If you were to purchase your own health benefits plan from an insurance carrier, you would simply take the expense of the plan, minus the cost of any LTD benefit, which you would likely pay personally. There would be no need to wash that premium through the HSA, as you would be paying for the cost of the HSA alongside the additional admin costs and profit charges embedded in the insured plan.
There are some wonderful HSA service providers with great tech, robust online applications and some with fully embedded pay-direct drug cards that you can use at the pharmacy counter. You might be just as well-served by electing to park your account with a relatively simple service provider who makes up for a lack of “tech” by providing truly remarkable service.
The choice is yours. You can either take taxable income from your company and pay for healthcare using high-cost dollars or fund your healthcare using a tax-efficient benefit plan that embraces a Health Spending Account, in whole or in part.
Next time, we’ll dive deeper into the question of how business owners can fine-tune their healthcare to include little-known products and services to deliver a better personal care experience AND help boost or maintain their corporate bottom line.
Please do reach out if you would like to learn more or discuss how the HSA concept could be made to work for you.
With over 42 years of experience as a sales professional and business owner, Bob works with small business owners, incorporated individuals and their advisors to provide guidance on their investments, insurance and benefit plans. He has developed a specialty helping Canadians navigate the executive and specialty healthcare and individual private medical insurance market.
bob.carter@carterconsultingcorp.ca
1 https://www.fraserinstitute.org/commentary/small-business-canada-reality-check
Disclosure: The information presented reflects the opinions of the author and not Canadian MoneySaver Magazine. Readers should do their own research and, where applicable, request and read a prospectus. Investing carries risks, including the risk of losing capital.
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info@probityhealthandwealth.ca