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Private Health Services Plan (PHSP) Concepts
Structure
A Private Health Services Plan (PHSP) is a tax relief measure
introduced in Canada to allow small businesses to claim expenses
related to health coverage for employees as a deductible business
expense. At the same time these health service expenses are not
a taxable benefit to the employee allowing the employee to receive
the re-imbursement of the expense tax-free. There are significant
tax savings to both the business and the employee. The structure
of many vendor PHSP offerings is very low cost with no premiums;
Brock Health Administration is the lowest cost Private Health Services Plan (PHSP) in Canada.
This means a small one person business can deduct health expenses
without an elaborate and expensive health insurance plan.
Covered Employees in a PHSP include:
• the employee
• the employee's spouse
• any member of the employee's household with whom the employee is connected
by blood relationship, marriage or adoption.
The Difference between Health Insurance
and a PHSP
A PHSP is a tax friendly method of covering health expenses as
a business expense. It must be recognized that many small businesses
could not absorb large expenses associated with a catastrophic
medical event. A PHSP is “in the form of insurance”
but in most cases the business would go insolvent if it were to
indemnify unlimited coverage. A small business owner may choose
to cover that risk with a secondary comprehensive health insurance
plan, like Blue Cross or simply rely on the provincial health
plan.
Health insurance distributes the risk of catastrophic events over all
Planholders, so monthly premiums must be charged to all Planholders
whether a claim is made or not. A PHSP generally only charges a fee
when a claim is made.
Examples
Example 1 – Incorporated Consulting
Services Firm (One Person).
This small businessman offers his management consulting services to
a variety of clients. He is the only employee of the company. His wife
is a homemaker and he has two young children. This year the family had
4 dental visits, a handful of prescription medications, two chiropractor
visits, and a pair of glasses. The total health services bill came to
$2,100. He has a marginal tax rate of 40% combined federal and provincial
tax, which means he must draw earnings from his company totaling $3,500
to cover those expenses. He pays $1,400 in personal tax on those earnings.
With a PHSP, the same medical expenses would cost his company a total
of only $2,210 ($2,100 in expenses + $105 Brock Health Administration
fee + $5.25 GST). He pays no personal tax on the reimbursed expenses.
That is a saving of $1,290.
Example 2 – Incorporated Design
Firm with 4 Employees.
This businesswoman has a small company of young designers in the advertising
industry. She is the owner and lead designer but needed to offer a benefit
plan to keep her employees loyal to the firm. She looked at a comprehensive
health insurance plan but found the monthly premiums were too high for
the coverage she wanted and there were many restrictions on what was
covered. With a PHSP, she could specify a maximum amount that each employee
could claim in a year. She used that to control her maximum costs. The
business owner gets to set the limits. For example, an amount of $500
or $1,000 per year could be used for new employees and it could be increased
for different (more experienced) classes of employees. The flexibility
of eligible expenses allowed her employees to appreciate the benefit
and claim such things as massage therapy, supporting a handicapped parent
and 100% of dental and drug expenses. The PHSP kept her employees happy
and her costs were contained.
Example 3 – Sole Proprietorship.
A sole proprietorship is somewhat more restrictive than an incorporated
individual in that there are limits to total amounts that can be claimed
per year. Otherwise, the tax benefits are identical.
-For the proprietor $1,500
-Proprietor’s spouse $1,500
-Members of the household 18 and older $1,500 each
-Members of the household under 18 $750 each
Example 4 – Professional Corporation.
This lawyer is a home based business with no administrative staff. She
is the only employee of the company. Her husband works full time and
has health coverage through his place of employment. Their 4 children
are in high school and in the local university. Their expenses this
year included dental visits, orthodontic work, prescription medications,
3 pair of glasses, and some cosmetic laser therapy on varicose veins.
The total health services bill came to $8000. The husband was able to
claim $4,800 through his employer, for which he was reimbursed $3,800
due to deductibles, percentage coverage limits and restricted claim
types. That left the family with $4,200 that was paid out-of-pocket
($8,000 less $3,800 re-imbursement). With marginal tax rates of 44%
combined federal and provincial tax, she needed to draw out from her
corporation, as earnings, a total of $7,500 to cover the $4,200 net
expenses. She paid $3,700 in personal taxes on those earnings to cover
the health claim.
With a PHSP, the same medical expenses would cost her company a total
of only $4,421 ($4,200 in expenses + $210 Brock Health Administration
fee + 10.50 GST). She pays no personal tax on the re-imbursed expenses.
That is a saving of $3,079.
In these examples, the marginal tax rates used were reasonable estimates.
That rate will vary between provinces of residence and with total taxable
income. Your accountant can provide your rate.
Summary
These numbers are compelling for every small business in Canada. There is no reason not to have a
PHSP as part of your tax planning strategy. You only pay if you
use the plan. There are no premiums, no medical test and no ongoing
fees.
If you’re a small business without a Private Health Services Plan (PHSP), enroll
in a Brock Health Administration plan today and start reducing
your taxes.
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