AdviceThe Best Benefits Plan You’ve Never Heard Of
Originally published by Surrey Business News
A not-so-new benefits vehicle that is gaining traction in recent years is the Private Health Services Plan. While PHSPs have been available to Canadians as a tax-advantaged health expense product since the mid 1980’s, they’ve suffered from a knowledge gap and many professionals are unaware of the opportunity. Although “PHSP” represents their technical tax name, they are most commonly marketed as “Health Spending Accounts.” For a number of reasons that are largely financial, HSAs are experiencing a surge in popularity. Whether as a alternative or a supplement to a traditional benefits program, HSAs offer some outstanding advantages for both owners and employees, but they come with some corresponding disadvantages.
For business owners, HSAs are essentially a CRA approved way to transform after-tax personal medical losses into a fully tax-deductible business expense. All costs are funded by the business using before-tax money providing a 100% tax write-off for the owner and a non-taxable benefit to the employees. When I explain how it works to business owners, I’m often met with hints of disbelief: “And this is legal?” But there is a logic driving the HSA concept that otherwise sounds to some owners like an invitation to a back-room deal. While in a conventional plan the employer pays a tax-deductible monthly premium for protection against potential and ongoing medical and dental costs, an HSA turns these same expenses into the tax equivalent of a premium that gets paid, in contrast, only after a medical or dental cost is incurred on a fee-per-claim basis. For small business owners frustrated with the structure of traditional benefits plans—their relative inflexibility, limited options, and specificity—the HSA platform provides affordable access to the same tax-advantaged opportunity for all personal medical and dental expenses. If you don’t yet have traditional benefits in place and you’re worried about affordability, yet you want a potent tax-saving and employee retention tool, an HSA might be the right place to start.
The best candidate for an HSA is an incorporated business with one to 50 employees. However, HSAs make sense for anyone who doesn’t have a benefits plan and has medical expenses they can’t otherwise write off. If you have access to your receipts, it may not be too late to deduct this last year’s expenses. I recently spoke with an uninsured sole proprietor who had spent $5000 on his family’s dental work in the past year which he will now be able to fully write off—he was only frustrated that no one had told him sooner. Though there are restrictions on the use for sole proprietors, they remain a useful way to deduct medical expenses for all self-employed owners. An HSA even makes sense for those who have a traditional plan that doesn’t cover certain medical procedures, such as orthodontics, laser eye surgery, crowns, cosmetic surgery, etc. and can be used to pay expenses not covered by a spouse’s benefits plan. There are no monthly fees or hidden costs, you can use the plan as often as you like, and you only pay (usually a fixed percentage) when you submit a claim.
While traditional plans are subject to yearly renewal rate increases, as an alternative option an HSA’s greatest advantage is cost certainty. The employer is able to pre-determine their contribution to an employee’s medical expenses and the employee in turn is able to freely direct that coverage to their greatest family need. Also, the employee’s participation in funding their medical expenses is optional and unused amounts revert back to the employer as taxable revenue. For the employee there are no co-pays, deductibles, benefit limits or dispensing fees.
The application paperwork is minimal, the plan design is open, and in many cases the claims process is automated via cell phone app. While the least expensive and most cumbersome option is a self-administered plan, a quality HSA—at very little extra expense—will perform CRA sensitive receipt adjudication and provide monthly invoices to the employer for virtually hands-free administration. They make employers look great to their employees.
However, I would not recommend replacing a traditional plan with an HSA. They do have some significant drawbacks that explain why they should ideally be a precursor or play second fiddle to a traditional plan. First and foremost, they suffer from a lack of catastrophic prescription drug protection. For many employees, the amount offered via an HSA is adequate, but they do little to protect the healthy from a bad year and for the unfortunate few who face high prescription drug bills their lack of coverage can be devastating. They also lack a pay direct drug card. Employees have to fund their own medical costs, including prescription drugs, and then wait for reimbursement. If money is tight, this becomes a serious liability. The quality of employee benefits is an important concern for prospective and current employees. Traditional benefits thus remain the gold standard. HSAs are a terrific way to get your company’s foot in the door to the benefits world. Some of the most dynamic businesses I work with have also found in HSAs a competitive supplement to a current plan and a satisfying strategy of employee recruitment and retention.