Author: Alden Hui, Olympia Benefits
A Health and Welfare Trust is often referred to as a Health Spending Account (HSA) or Private Health Services Plan (PHSP). These names are used interchangeably and usually mean one and the same thing. For ease of reading, I will refer to these plans as a Health Spending Account (or HSA) for the rest of the article.
A Health Spending Account 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. You are suitable for an HSA if you own a business, pay medical bills, and pay income tax.
While these plans offer health benefit coverage, it is important to understand that they operate based on principles of tax planning. As a result, the product works differently based on your company structure (business with arm’s length employees vs. with no arm’s length employees).
For a business with arm’s length employees:
An HSA is an affordable addition to your employee benefits package. They provide flexibility because employees can choose how, when, and where to spend their 100% tax free allowance. The employer can choose how much and to who they designate these allowances to. This, in turn, can save the business money and retain loyal employees.
Here are some more reasons an HSA makes a great addition to your employee benefits plan:
- Transfers the value from the employer to the employee directly
- It is easy to understand and use
- Funds not used by the employee are returned to the employer
- The value of a 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 health or dental 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.
For a business with no arm’s length employees:
An HSA turns your after-tax personal medical expenses into before-tax business deductibles (through your business).
In this circumstance, it is easiest to understand the cost-savings of an HSA via case study:
How do taxes impact the cost of my medical expenses?
As a business owner, you receive income from your corporation. In Canada, we have a progressive tax structure. Meaning the more income you make, the more the government takes. Your marginal income tax rate will have a significant effect on the total cost of your medical expenses. Your marginal tax rate is the combination of your provincial tax rate and the federal rate.
For example, if you earn $100,000, you would have to gross $1.78 to bring home $1.00 after-tax. $0.78 of your gross $1.78 (or 43%) would be taxed, leaving you with $1.00 after-tax.
Below is an example of a savings comparison between medical expenses paid personally vs. through your business using an HSA.
On the left you can see the true cost to your company when you pay for a $3,000 medical expense personally with after-tax dollars.
On the right, you can see that 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!
In many cases, a Health and Welfare Trust (or Health Spending Account) will be used for small companies and self-employed business owners (contractors, consultants), as these plans typically fit very well with small organizations.
To learn more about a Health and Welfare Trust/Health Spending Account, I recommend reading the Olympia Complete Guide to Health Spending Accounts.
If you would like to see how much you could personally save with a Health Spending Account, try our HSA Savings Calculator:
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.