Mike Hughes, CA and Taxation Specialist at MNP LLP brings today’s health news to you. This article was recently published in Small Business BC and explains how a Private Health Services Plan (PHSP) helps business owners looking for an alternative to traditional employee benefit plans. Read on...
Let’s set the scene – you are an entrepreneur who recently incorporated a rapidly growing business. You have a spouse who isn’t working and you are about to have your first child. Currently you have no staff, but your business is expanding rapidly and you need to hire some employees.
As you start to write the job posting, you suddenly realize that any suitable candidate is going to want medical and dental coverage. You have been so busy dealing with the increase in customer demand that you haven’t had time to think about this for either yourself or your future employees.
So What Are Your Options?
Group Insurance: Generally provides a set list of what is covered at a fixed cost. These plans are often fully customizable to suit your business needs. To maximize savings on benefit plans, speak to a benefit plan consultant consultant.
Private Health Services Plan (“PHSP”): A PHSP allows employees to pick and choose the medical services they require while offering the business a certainty as to its costs. They are straightforward and easy to understand for both the employees and the employer.
What Is a PHSP?
In essence, a PHSP allows employees to have their medical expenses reimbursed on a tax-free basis while enabling the business – either a proprietorship or a corporation - to have a full deduction for the reimbursed expenses. Effectively you have transferred an out-of-pocket and after-tax expense into a business deduction.
As Revenue Canada states in Interpretation Bulletin IT-339R, to qualify the PHSP must be in the nature of insurance. This means it must be “an undertaking by one person, to indemnify another person for an agreed consideration from a loss or liability in respect of an event the happening of which is uncertain.”
Further, the coverage under a PHSP must be for medical care that would normally qualify for the medical expense tax credit under the Income Tax Act.
How Does It Work?
Generally a PHSP is set up through a third party service provider provider. The employer will contract with the PHSP provider to cover certain medical costs as defined in the employees’ employment contract (e.g. up to $1,000 for a certain level of employee, up to $5,000 for another level, etc.) on a “cost-plus” arrangement.
When the employee, or their family member, incurs a medical expense, they pay for it out of their own pocket and submit the medical receipt to the PHSP Provider. The employer issues a cheque to the PSHP provider for the amount of the expense, plus an administration fee of a certain percentage of the costs (10% is normal). The PSHP provider in turn will reimburse the employee for their actual costs and keep the administration fee.
As previously mentioned, the reimbursement received by the employee is on a tax-free basis. The employer will get a full deduction for the amount they have paid.
Top-Up Group Benefits with a PHSP
Business owners can enroll themselves, active shareholders and executives into a PHSP to top-up medical expenses that are not covered under a group benefits plan already in place.
A PHSP covers any out of pocket expense that is not covered by your spouse’s group benefits plan including extended health and dental premiums and deductibles.
Consider What's Best for Your Business
A PHSP may not be the perfect solution in every situation. But depending on the types of benefits you want to provide and the number of employees you have, a PSHP can be an extremely useful component of a business owner’s toolbox and may be worth considering.
This article was originally published on Small Business BC and republished here with the permission of Mike Hughes, CA.
Whether you are with a business, association, or owner operator, we have the solution for your needs.