Private Health Services Plan (PHSP) Concepts

Structure

employee handbookA Private Health Services Plan (PHSP) is a tax relief measure introduced in 1986 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 one of 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 method of covering health expenses as a business expense to a predetermined dollar amount. The business owner sets the annual dollar allowance amount for each employee and this number will only change when the business owner chooses to do so. You can forecast and budget your health expenses into the future with certainty.

Health insurance on the other hand distributes the risk of events over all planholders, so monthly premiums must be charged to all planholders whether a claim is made or not. Insurance plans also vary significantly in the level of coverage you receive, depending on how high of a premium you want to pay. Insured plans must charge you enough in premiums to cover the predicted cost of the health claims, plus their expenses. You can never continually get the same or more out in claims than you pay in with premiums or else the insurance company would go bankrupt.

More comprehensive plans have more coverage and have fewer restrictions but are also more expensive. The more risk that is covered by the insurance plan the higher the cost. In addition to claims costs, insurance companies also charge for assuming plan “risk”, administration fees, sales fees and profits. These are built into insurance premiums you pay. The insurance company determines your health premiums each year. The only way you can reduce costs is to reduce your employee coverage.

A PHSP generally only charges an administration fee when a claim is made. The coverage is very comprehensive and allows more choices of eligible services. Furthermore, you pay for only what you use when you use it, so there are no monthly premiums.

It is also possible to use a PHSP in combination with an insured plan. However, many businesses and individuals simply choose to rely on provincial health plans to provide coverage for catastrophic events and use their PHSP for routine coverage.

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 to leave him with $2,100 to pay the health expense.

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), register in a Brock Health Administration plan today and start reducing your taxes.