≡ Menu

The Basics of the Health Spending Account

If you are a shareholder of a Canadian Controlled Private Corporation (CCPC), have employees with or without health coverage, and looking for a way to save overall taxes, then this article may be for you.

With health care costs increasing every year, an entrepreneur reader emailed me to ask about the Health Spending Account (HSA).  The HSA is basically a registered account with a CCPC that allows an employee of that company to receive tax free health benefits.  In addition to the tax free benefit to employees, the company funds the HSA with pre-tax dollars, which means there is 0% tax paid overall on the health benefit.

What are the Benefits

A funded HSA can be used by employees, their spouses and their dependents towards medical or dental expenses.  It can be used in conjunction with health insurance to cover the deductible or as a stand alone benefit.  Putting my employee hat on, I can see this as a real perk, especially since it’s a tax free benefit, in other words, free money!  In addition, if the health insurance plan is on the lighter side (ie. no orthodentic coverage), then the HSA can be used providing the expense qualifies as a medical expense under the Income Tax Act (link).

Switching back to the entrepreneur,  not only does this add an extra incentive in the employee pay package, it has the benefit of using pretax corporate dollars.

One thing to note is that the HSA can only be used for real employees, and not just shareholders.  If my online company is still around when my kids get older, I will be looking into the HSA to pay for orthodontic work (ie. braces) or other big ticket health items.

How is it Used?

The employer sets up an HSA for each employee and funds the account at their discretion (no maximum).  If the employee does not use all the credits in the account, it can be carried forward (with restrictions).  Claiming using the HSA should be relatively straight forward as well.  On most insurance claim forms, they’ll have a section for the HSA details.

Drawbacks

The one drawback that I could find from using the HSA is that since it’s a registered account, claims are required to run through a third party which leads to extra fees.  When the HSA is used as a standalone account (ie. not for paying the insurance deductible), the third party services out there charge a setup fee and another fee equivalent to 5%-10% of the claim.  Fortunately though, the fees are paid for by the company and are tax deductible.

I couldn’t find the fees that insurance companies charge to cover the deductible, but i’m willing to guess that they charge about 10% to process the HSA claim.

Final Thoughts

Drawbacks aside, I think the HSA is a great tool that isn’t talked about enough.  With medical expenses on the rise and health insurance policies covering less, companies can fund the HSA using pre-tax revenue to fill the gap and add real tax-free value to employees.

Do you have a Health Spending Account benefit at your work place?  If so, I’d like to hear about your experiences.

If you would like to read more articles like this, you can sign up for my free newsletter service below (we will not spam you).

FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 20 comments… add one }
  • On Demand January 16, 2012, 11:05 am

    I just started a PHSP. Is there any difference than HSA? What is a better plan for small business?

    • FT FrugalTrader January 16, 2012, 11:14 am

      From what I’ve read, the HSA is for CCPC’s only where the PHSP can be used for sole proprietors. I’ve never set one up, but I’ve read that HSA’s can be a bit simpler in terms of administration.

  • Bill January 16, 2012, 12:22 pm

    I have a PHSP (Sounds like the same thing, different name). Works great for my small incorporated business. Turns out of pocket, after tax expenses into deductible expenses.

    When I first set one up, I had a small bet with another colleague to find the cheapest fee PHSP – I won with a 5% fee. Despite the cheapness, very very happy with them. Prompt turnaround (usually 3 days), direct deposit of the claims, year end statements, etc.

    If you are incurring the expense anyways, best to have one of these. You or your company are still paying though – its not like true benefits in that sense.

  • Fit January 16, 2012, 1:44 pm

    PHSP is one of those things that is almost like a “buzz word” nowadays haha kind of like “synergy”. It does have its perks but also has a couple disadvantage as well. I think that like the defined benefit pension plan, it will go the way of the dinosaur as it is costly to implement depending on firm size

  • wendi1 January 16, 2012, 4:43 pm

    In the PHSP, as the employer, at the end of your fiscal year you send the bundle of health receipts to your provider, along with a cheque for for the total. They send you back another cheque, with say, 5% taken off.

    The advantage here is that you expense the cost to your corporation (or sole prop.), and therefore pay for health care with before-tax dollars. I did the math, and it seems like a lot of trouble for the very small benefit.

    Of course, I don’t have kids with braces or lots of expensive prescriptions…

  • Saveddijon January 16, 2012, 9:19 pm

    The company I co-founded used to be CCPC but is no longer due to events (acquisition of a U.S. business) that caused us to change the corporate structure.

    We have a PHSP through Olympia Benefits. It’s much cheaper than Great West Life’s insurance plans.

    Overall I like the service. The one downside: Olympia does not (yet?) support mag-swipe cards that permit dental work and prescription drugs to be direct-billed to Olympia. Instead, we must pay out of pocket, and then file a claim. Unless the amounts involved are very large this is not a hardship.

    I would recommend Olympia Trust to any small business.

  • FT FrugalTrader January 16, 2012, 10:53 pm

    @Saveddijon, can you tell me more about the cost to setup and claim through Olympia?

  • newbie January 17, 2012, 3:04 am

    I use chamber of commerce for my PHSP. If you have health and dental coverage through the chamber you also have access to their PHSP which is 5% fee with a max fee of $125/claim. I run one claim a year to save more. membership in chamber varies but you can usually find a small chapter for $50/year.

    I would only recommend this option if you are also in the market for health and dental

  • Mark Feltham January 17, 2012, 12:25 pm

    I looked at Olympia but decided on Brock Health Administration – http://www.brockontario.com. Brock has a lower setup fee of only $100 and a lower 5% fee for the administration compared to Olympia’s 10%. There was no difference in service and we have been very happy with Brock for the past two years.
    Wendi1 is right about the math: PHSP Tax savings = Health Expenses * marginal tax rate. Setting up a PHSP and it doesn’t make sense if your business is very small and you have a low marginal tax rate, or if your health related expenses are low. However, if your business is doing well your marginal tax rate is probably in the 35-44% range; if you spend only $2K on health related expenses in a year that is a tax savings of at least $700 annually.
    For us, we easily spend over $3000 each year on prescriptions, naturopath, dentist, massages etc, and once set up, there is very little effort to save the tax.

  • Saveddijon January 17, 2012, 9:21 pm

    @Frugal,

    Mark likely has the figures right. You could always talk to Olympia directly. I am not the accountant, so I don’t have the figures offhand.

    In my case, the business employs a dozen or so in Canada. In my industry (hardware design consulting) health plans for employees are an expected benefit, so it is not reasonable to simply not have benefits of any kind. Olympia is more cost-effective than insurance to provide these benefits.

  • Ed Rempel January 19, 2012, 11:50 pm

    Hi FT,

    Good article. We have been using a PHSP for quite a few years and are very happy with it. It was useful when our business was just my wife and I, and it is more useful now that we have employees.

    For our own expenses, it essentially makes our health costs a business expense. If we claimed them personally, there is only a tax credit based on the amount over 3% of our income, which would not provide any tax savings.

    For my wife and I, there is no limit.

    Now that we have employees, it provides a premium employee benefit, since it covers a much wider range of health costs than most insured health benefit plans of large employers. Essentially any expense that would be claimable on your tax return is allowed as an expense in a PHSP.

    For employees, we set the limit for each employee category, which limits our costs. For our employees, it is important to keep a competitive benefit plan. The expenses covered are broader than most large employers, but PHSPs have a limit. We added a “Stop Loss Program” to it, which is essentially an insured plan with a high deductible, so it covers costs above the PHSP limits.

    @Mark, The savings = (medical costs * (marginal tax bracket of corporation – processing costs)) – personal tax credit. There is a processing cost + HST charged for each claim, but there is no annual cost.

    Even at the lowest corporate tax rate, there are reasonable savings, unless your health costs are very low.

    The costs are far lower than with insured health plans. You can start with just the owner, while with insured plans, you usually need 10 employees before they become cost-effective.

    Cheap is good for a provider, but you should make sure they are current and would be good at representing you against CRA if there was every an issue.

    Ed

  • sam January 20, 2012, 1:50 pm

    Hi Ed,

    thanks gain for your insights..
    your equation where you subract the personal tax credit is great..many of the advertisements miss this portion.

    could you please check if my calculation are right…

    client salary $50,000..Corp is a CCPC 15% approx rate. medical expense $2,000

    if client pays it personally he can only get to claim $500(3% of $50,000 = $1,500 is lost).
    he benefits 20% of $500 = $100..20% was the fed & Ont combined non refundable rate..which is the the lowest tax rate.

    if corp pays using PHSP..corp benefits 15% which is tax rate..but loses 10% on adminstrative fees…the net benefit is 5% on $2,000 which is $100 which is exactly the same as his personal credit…

    so there is no benefit if using phsp in this example.

  • sam January 20, 2012, 1:54 pm

    Hi Ed,

    one more question..

    the discusion about whether to use PHSP or not is based on assumption that you would pay the bills..

    if the client is afraid of a surprise big medical bill…then i figure taking a medical insurance plan would be the option for him..am i right..

    if yes , can the Corporation pay the premium for the medical insurance & claim the premium as a expense..whil there be a taxable benefit for the owner/employee..

    Thanks as ever

  • Ed Rempel January 21, 2012, 6:36 pm

    Hi Sam,

    Your calculations are correct. Most of the self-employed people we see would get no personal medical tax credit at all, either because their income is too high or because the medical expenses are too low.

    If there would be no personal tax credit at all, then there is normally a benefit from a PHSP. Most of the time, the benefit is not large, but the paperwork is not much more than claiming medical expenses on your personal return.

    Yes, if you are scared of a very large medical bill, such as a large drug cost, then an insured plan is better. Insured plans are not really cost-effective until you have a few employees. You probably should have 5-10 employees before considering an insured health plan.

    The best option is often to have both. You can have a PHSP that covers all the basic expenses and has a tax savings. Then you add on a “Stop Loss” plan, which is an insured health plan with a very high deductible. For example, it may only cover costs over $2,500/person/year. This would still protect you from a high medical cost and the premiums can be very low.

    If the corporation pays the health plan premiums, they are normally deductible to the corporation.

    Ed

  • DancingSamurai January 22, 2012, 2:16 pm

    I set up a Health and welfare plan through gblinc.ca, which sounds similar, except I administrate it so there is no % overhead (setup costs were $1500 + tax though) (There is an arms-length trustee on the paperwork for legal reasons). At least that was what was sold me.

    Turns out through their discussions with CRA that here in Ontario the RST (8% tax) applies to payments made through the trust, which I did not know about before (to be fair apparently this is a new discovery) and alters the numbers a bit.

    Still, for a family of four where we all need glasses, some medications, etc, it still works out as a net benefit.

    I don’t currently have any other employees, but it is a bonus as well.

    I also have an insurance plan that covers most expenses after a large deductible, so the best of both worlds.

  • Perry Shoom March 27, 2012, 6:56 pm

    Hi.

    This is one of the better discussions I’ve seen about Health Spending Accounts but a few of the comments may be misleading. Below is some clarification on some of the comments I have read here.

    1. HSAs (sometimes called HCSAs, HWTs or PHSPs depending on the individual and situation) were created by the Government of Canada in 1986 to help Canadians pay for their medical expenses. They are designed to be flexible, allow for a broader range of deductions and do not have limits on coverage for specific expense categories.

    2. HSAs are most beneficial to business owners who benefit from both a business expense and a nontaxable employee benefit. Employees benefit from receiving a nontaxable employee benefit. There can be a benefit from an individual setting up their own HSA if not an employer but I am not certain of this. You will find that most HSA providers only offer this service to businesses.

    3. Wendi1 mentions something that is called a Cost Plus Plan. This is not available to most businesses. If your business has one of these plans and you have not checked with your advisor or accountant about its legitimacy as a tax deduction, a CRA audit could be costly.

    4. The value of an HSA depends on many factors including the province you reside in, your income level and the amount you spend on medical expenses.

    5. Medical expenses that can be reimbursed through an HSA (with proper documentation) are more extensive than most realize. They can include education or training (for handicapped family members,) home upgrades, specialized furnaces (for those with breathing disorders,) nursing homes or home care and much more. Savings should be looked at in terms of dollars and not percentages. Every dollar saved is another dollar available for other purposes.

    I am with PreAxia. We administer HSAs for brokers and others. Our site includes an HSA Education Center that contains articles and media coverage on HSAs. There is also a calculator that allows you to determine your own savings from having an HSA.

  • Anna October 28, 2012, 4:52 am

    Hi.

    Wonderful and informative article. I am an incorporated company of one and have been doing some research on the healthcare end. I find that PHSP benefits info is based on the family of 4, i however am an owner of an incorporated business ($100k-200k), no dependants. I am wondering if going the PHSP route is worthwile for my situation.

    Any geedback is greatly appreciated.

  • Steven June 26, 2014, 1:19 am

    If you are an Insurance Advisor you will want to contact Assureflex
    they have been providing (Non-Insured PHSP’s) HSA’s since 1988

    They provide Trustee, and adjudication services for a “True” 10%
    some offer their services for less but when you add up their ancillary
    fees, such as enrollment, set-up fees, per cheque processing fees
    you quickly discover it isn’t 5%

    Assureflex doesn’t require annual or monthly deposits, they pay claims
    as they are submitted (in advance of payment) and bill monthly in arrears,
    so there is no need for companies to reduce cash flow, and tie money up
    in a non-interest bearing deposit funds.

    -In addition they adjudicate and pay claims within 8 business hours
    -Claims can be submitted by mail, fax or email
    -Claims submitted electronically are processed same day, and they have
    facilities to make direct payment to your account, submit and have reimbursement funds in your account same day.
    -They will pay various practitioners directly if claim is assigned for payment
    -They will work your existing agent or broker so you maintain the professional facilitator that you know and trust and have a relationship with.

    It is important to note that there are HSA Trustees who do not abide by CRA Guidelines, they for example allow Non-Incorporated Business Owners without arms-length employees to participate in an HSA, some have been known to disregard place of supply rules and fail to remit the appropriate Provincial taxes (making it the consumers responsibility to self-report), or paying for nearly any claim (pass-thru service) though they are not eligible.

    A trustee that doesn’t know, understand or ignores tax law and CRA isn’t
    one you should trust a CRA audit could lead to substantial penalties and
    the deeming of all claims, even those that were eligible to be considered taxable.

    Assureflex abides by the CRA Guidelines as they recognize this as their professional obligation to consumers, and this is why thousands of employers and Insurance Advisors entrust Assureflex in providing services.

  • Carey Vandenberg January 29, 2015, 6:00 pm

    I agree with Steven on a lot of the details. There are a lot of HSA / PHSP providers but only a much smaller number that don’t cut any corners and won’t put you in a position of potentially getting your medical expenses disallowed. I know this thread is old but there have been some significant changes / cost competitiveness in the industry in the past couple of years. Olympia Benefits has revamped their plans and offer 1 for $299 / year with $0 other fees and that INCLUDES travel insurance (which is done through Travel Underwriters who most institutions use for Travel Insurance. I am a Financial Planner and have used both for many years as well I have one for my own company with Olympia. You can see what they offer here under “Health Spending Account” http://careyvandenberg.com/paperwork.php .

  • Nikhil April 18, 2017, 12:28 am

    The HSA does require a maximum amount established but it can be updated every year on your plan anniversary.

Leave a Comment