A Health Spending Account is a Private Health Services Plan (PHSP) that provides a tax free benefit that a corporation (as an employer) provides to employee-owners, employees and their dependents. A Health Spending Account can be used as a standalone plan, or, if you have an existing health insurance plan (e.g., Blue Cross, Manulife, etc), it will cover all the expenses and health care services these traditional plans do not cover.
A Health Spending Accounts is as essential as a bank account for incorporated Canadian companies. Any company accountant will recommend a Health Spending Account, without reservation. One only has to examine the issues that arise if a business does not put in place a Health Spending Account.
Without a Health Spending Account at least four key issues arise:
1) Employees (or employee-owners) need to use after-tax salary to pay for health care expenses, including those expenses not covered if they happen to have a traditional health insurance plan. This results in companies overpaying Canada Revenue Agency about $2 to $4 per day per person, the bulk of which cannot be recovered
2) Only a small percentage (5% to 9%) of out-of-pocket medical expenses are recoverable by employees, at year end, through their personal taxes
3) Employers may be required to provide a wage increase to cover employee benefit costs, which is 30% to 40% more expensive than providing benefits via a Health Spending Account
4) Employees are saddled with increasing health care costs, and limited access to the services can negatively impacting employee satisfaction / retention. This can be a real issue if competitors offer a Health Spending Account to help offset these costs.
For a small businesses (especially single owner businesses) a Health Spending Accounts is not a lot different, in principle, than the treatment of mileage expenses for a vehicle. These businesses always use before-tax dollars to pay for vehicle mileage and health care is no different. If one uses before-tax dollars to pay for vehicle mileage, then why would one use any after-tax dollars to pay for health care costs?
A traditional health insurance plan is only a partial health care solution for businesses. The shocking truth is monthly health benefit plans are designed to yield a minimum of 30% in profit for the Providers when it comes to routine health care expenses. On average, a small business will get 50% to 70% of the premiums they put in – the traditional monthly plans are designed that way, especially for the smaller businesses. And, if you claim more in one year, your premiums or limitations will normally increase to maintain that minimum 70/30 ratio. Many small businesses keep these plans to cover catastrophic events (i.e. accidental dental, private nursing care, etc) but a before-tax health care solution is still essential to pickup all the remaining costs. The only way to accomplish this is with a Health Spending Account.
There are at least 7 advantages businesses can realize by putting in place a Health Spending Account. These include:
1) Paying for Health Care costs using before-tax money
2) Minimizing overpayment of health care related taxes to Canada Revenue Agency
3) Eliminate or minimize employee out-of-pocket health care expenses
4) Quick reimbursement for out-of-pocket expenses to owner-employees, employees,
5) Providing access to virtually unrestricted health care services
6) Spending 30-40% less than on health benefits than the equivalent salary increase
7) Improving employee satisfaction and retention: 50% of employees prefer health benefits vs. the equivalent salary increase – 2009 study sponsored by Health Canada
In today’s competitive business environment is it any wonder why most Canadian businesses are beginning to accept that a Health Spending Account is as essential as a bank account.