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Every few weeks, I am showcasing a different advantage of owning a Health Spending Account in this segment called…
HSA Advantage….
Tax savings. I wasn’t going to add this to my blog as I assumed everyone understood this as a benefit by now. But in thinking about my posts, I wanted to ensure everyone had clarity on ALL of the benefits of a health spending account, so here we go…
When an incorporated business opens a health and welfare trust (HWT) for one employee or numerous employees, the total amount (including the administrative fees) becomes an eligible business deduction for the company – just like paper for the copier, pens, staples, or materials. It comes off the books as an expense and the impact on taxes would be the same as any other accepted expense.
For sole-proprietors, the contributions are also an eligible expense. If it is one individual with no employees, the amount deposited into their private health services plan is declared on their annual return. In almost all cases, the amount provides greater tax relief than the standard medical tax credit they would traditionally apply for. For groups, the amount deposited into each employees health and welfare trust would be considered a straight deduction similar to incorporated entities and declared along with the owner’s PHSP on their annual return.
Another opportunity for tax savings is related to salary and total compensation. Some companies incorporate an HSA into the total compensation of their employees by amending the salary to include an amount to be deposited into a Health and Welfare Trust. For example, if an employee earns $80,000 and they agree to receive a portion in HSA contribution (say $10,000/year), the employees taxable income would reduce to $70,000 and they would receive $10,000 in tax-free earnings into their HSA. The benefit for the employer is that the $10,000 becomes a business expense and the source deductions owed by the employer on behalf of the employee would be reduced from a percentage of $80,000 to one of $70,000.
Either way, the key tax savings benefit is that the HSA allows you to pay for your expenses in pre-tax dollars as opposed to after tax dollars.
In recent years, I have seen a growing number of Health Spending Account solutions appear in the market. Some are great and I applaud those providers who have done their research and developed a product that is respectful of the interpretation bulletins published by Canada Revenue Agency (CRA). However, a growing number of companies have entered the market in recent years looking to make a quick buck without truly investing in their knowledge of the product. To help, I thought I would start a new blog series…. items you should look for when choosing an HSA provider…
Unused Funds Being Returned to Company
Canada Revenue Agency is pretty clear on this issue - funds can NEVER revert back to the employer. The only time this can happen is when an HSA is used in a notional credit program combined with a flexible benefits plan. If you are working with a supplier and they allow you to take back unused funds from an employee if they quit, then you should re-evaluate your choice of supplier. Many of the new suppliers have taken the rules outlined in CRA bulletin IT-529 Flexible Employee Benefit Programs, and confused them with the guidelines outlined in IT-339R2 Meaning of Private Health Services Plan.
The guidelines outlined in the later bulletin, and to an extent those outlined in the original IT-85R2 Health and Welfare Trusts for Employees, are truly the best bulletins to follow regarding PHSPs and HWTs. The information in IT-529 is related to flexible benefit programs and provides an overview of how to account for benefits using a notional credit program. A notional credit program supports flexible benefits or cafeteria plans – common in many large corporations. Running a flexible benefits program using notional credits uses an HSA (in the form of a PHSP) in addition to a core plan offering varying levels of coverage for the employees to choose – traditionally as part of an annual election process.
In summary, funds can ONLY revert back to the employer if the program is part of a notional credit arrangement supporting a flexible benefits program. They belong to the employee! If you have a Private Health Services Plan or Health and Welfare Trust where the supplier allows you to take back the money if an employee is terminated or leaves…..buyer beware!
I am often asked “why would anyone want to incorporate their business?”. I can understand the headache of more paperwork and reporting (I am living it right now), but what I cannot understand is why a business owner with an employee base would let incorporation stop them from truly benefiting from a health spending account.
For sole-proprietors, the only HSA available is a private health services plan or PHSP. If they are a small business with no employees, then it makes sense to stay unincorporated – unless their annual maximums do not meet their needs in terms of annual medical expenses. It is when a sole-proprietor has employees that the benefits of incorporation are revealed.
If a sole-proprietor has employees and wants to offer a health spending account to them, the employees would be eligible for a health and welfare trust (no limits, unlimited roll-over) while the business owner would be eligible for a private health services plan (caps on contributions, 2 years forfeiture of funds from date of deposit). But the real headache comes from the contribution limits for sole-proprietors in a group setting.
You see, the rules for unincorporated groups states that the business owner can only deposit as much into their PHSP as the smallest amount offered to their employees in an HWT. Let’s clarify this with an example…
A sole-proprietor (let’s call him Bob) has three employees, two salespeople and a receptionist, representing two employee classes in terms of compensation and role in the company. The two salespeople are entitled to a health and welfare trust of $1,200 a year and the receptionist is entitled to $800 a year. Bob has a wife and two dependent children under 18 years of age. In theory, Bob should be able to claim up to $4,500 each year in PHSP deposits (2x$1500 + 2x$750). However, because the receptionist is entitled to only $800, a year, Bob is now limited to the same amount, as she represents the lowest amount being deposited amongst employees. This means that Bob is losing out of $3,700 in HSA contributions each year.
The solution? Incorporation of course! If Bob incorporated the business, he could still deposit $1,200 and $800 into the salesperson’s and receptionist’s health and welfare trusts respectively. However, Bob would also be able to deposit whatever amount he wanted into an HWT for himself, as long as it was reasonable to his needs and role/position in the company. Anything perceived as excessive would be considered a shareholder benefit. Either way, he could at least deposit the full $4,500 he would have been entitled to as a sole-proprietor and receive an additional $3,700 business deduction – more than enough to cover the $250 Industry Canada Fee to incorporate.
I was at a cocktail party over the weekend and met another guest who happened to be an independent consultant. When I told her that I worked in the health insurance world, she went silent and looked as if she wanted to kill me! I noted the serious look on her face and said “Uh-oh, somebody better walk me to my car later..” She laughed, and apologized for the glare. She then explained herself..
It turned out that she did not have any prescription drug or dental coverage. She had applied to the three well-known carriers ( I won’t mention which ones specifically) and had been denied a suitable plan because of a pre-existing condition she had and the fact that she travels overseas frequently. The drugs she currently pays for, no matter what plan she selected, would never be covered. When she heard I worked in the health insurance world, she immediately wanted to give me a piece of her mind. That is, until I started to explain the concept of a health spending account.
In her situation, the HSA was the best solution. She had no problem getting travel insurance, but it would not cover the pre-existing conditions. That was the least of her concerns. What she wanted was a manner in which to pay for her day-to-day drug claims in a more cost-effective manner. Luckily, she was incorporated and was eligible for a health and welfare trust. Over a drink, we estimated her average drug costs each month (including her massage therapy and dental visits. At the end of the day, she needed a health and welfare trust worth about $200/month. While I could not calculate the exact savings on the spot I did explain that the total amount would be an eligible business expense for the corporation and tax-free for her to spend. Any overseas expenses related to her pre-existing condition would also be eligible as expenses from her health spending account – an added perk. While she thought that was impressive, she was really more excited about the fact she did not require the medical!
I thought I would shed some light on the growing movement in the US regarding consumer-driven healthcare. Each weekend, I read my Sunday New York Times. Over the past few years, I have noticed an ever increasing volume of content related to Health “Savings” Accounts as the driving force behind consumer-driven health care. Recently, the topic has started to surface in Canada as well. In fact, I have an article on this very topic in the upcoming edition of Benefits Canada – be sure to check it out! (Sorry about the gratuitous plug on my work!)
The controversy in the US over consumer-driven healthcare comes from the growing trend of large corporations pushing the decision making process for health spending into the hands of their employees. In doing this, many corporations have decided to offer their employees a Health Savings Account with a high-deductible insurance product and abandon their fully-insured plan. The key driver is cost as an HSA offers greater budget certainty versus traditional insurance plans. Those who oppose the model claim that consumer-driven healthcare places too much power in the hands of the employee and that the employer no longer has any responsibility in their health and well-being. Those in favor of consumer-driven healthcare believe that the model is a more sensible approach as it allows the employee to tailor their health benefit program to the unique needs of their family as opposed to being presented with a canned plan designed to satisfy the needs of all employees. Either way, the trend has become major news in the US and the HSA industry south of the border is exploding as we speak. By what about Canada and other countries? Will they follow suit?
My upcoming Benefits Canada article (the January edition) outlines the differences between the Canadian Health “Spending” Account and the US Health “Savings” Account. It also examines the challenges and opportunities for Canadian companies interested in adopting a similar consumer-driven healthcare model as their contemporaries in the US. While I will not get into the details on this blog before the article is printed (I would prefer that you pick up a copy of the magazine), I will cover some of these similarities in future posts.
Why do people hold onto their claims for such a long time? Seriously, what is that about? When I pay for a claim out-of-pocket, I submit it to Benecaid as I have a Health and Welfare Trust with them. I submit the claim form and receipt within a week of incurring the claim – but I am apparently a minority.
You see, many people batch their claims and submit them at once. What is surprising is that many people actually submit their claims once a year, sometimes for amounts exceeding $6,000! I scratch my head in amazement every time I hear this, especially if you consider the following.
Let’s say you have an HSA and make $6,000 a year in claims. For arguments sake, we will assume that you incur the same amount each month in healthcare expenses, $500. Most people batch their claims to save the cheque processing and postage fees (these average between $3.00-$4.00 at most administrators). However, if they sent them in each month, the maximum amount they would incur in fees would be $48.00/year, and that amount is being a bit aggressive. While we all like to save money, the issue here is that claims receipts have no interest bearing value – they are not making you any money while sitting in a shoebox. Or worse, the original costs are causing you to place other household expenditures onto a credit card each month and carrying a long-term balance. In which case the interest charged means that you are loosing money!
But let’s pretend that you have a big wad of cash under the mattress at home and do not need a credit card. If you submitted your claims monthly and deposited your $500/month reimbursement cheques into a RRSP at 3%/year, you would make $102.30 in one year and receive the tax deduction of $6,000 for registered savings. A year later, that amount would be worth $6,285.00 and in ten years, that initial deposit could be worth $8,200.00!! More than enough to pay for the $48.00 in fees but more importantly, you are putting your money to work for you and not letting it sit in some form of debt or non-interest bearing vehicle!
So, enjoy the tax savings from your HSA but please remember to submit your expenses for reimbursement! The faster you get the money back, the faster you can put it to work reducing debt or building wealth! I don’t want to do an interest calculation on a credit card at 22% to get the point across folks!
In order to understand the benefits of an HSA versus the traditional Medical Tax Credit, I thought it would be valuable to provide some basic information on the credit. If you own a company, you pay yourself (and your employees if applicable) a salary for the work performed. This salary is subject to source deductions like CPP, EI, and income tax. What you have left, you use to finance your lifestyle and in many cases, pay for insurance premiums or out-of-pocket health expenses such as dental bills, prescriptions, or elective surgery. At the end of the year, you can declare these expenses on your annual tax return and apply for the medical tax credit. The medical tax credit is a non-refundable tax credit, meaning that it can only be used to reduce federal or provincial/territorial taxes to zero.
Taxpayer and Immediate Dependents
Medical expenses for the taxpayer, their spouse or common-law partner, and dependent children under 18 are claimed on line 330 of the federal tax return. Only expenses greater than the lesser of $1,925 or 3% of net income can be claimed. The lowest tax rate is applied to the medical expenses to determine the amount of the tax credit you will receive.
“Other” Dependents
Medical expenses for other eligible dependents are claimed on line 331 and a separate calculation is done for each dependent. Only expenses greater than the lesser of $1,925 or 3% of net income of the dependent can be claimed, up to a maximum of $10,000 per dependent. The lowest tax rate is applied to the medical expenses to determine the amount of the tax credit you will receive.
The key difference between the HSA and the medical tax credit is that the HSA is a full-deduction for the business and 100% tax-free for the recipient (i.e. the employee). There are no thresholds for deduction by the company and the employee does not declare the deposits into the HSA as the amount is not considered to be income. The amount spent from the HSA on eligible medical expenses represents a true dollar value in tax-free benefit for the employee versus the amount received from the medical tax credit, which is only a portion of the actual cost. However, it is important to note that the HSA does not reduce overall personal income tax like the medical tax credit – unless it is paid in lieu of a portion of the employee’s normal salary. For example, if the employee earned $100,000 in 2007, the source deductions would reflect the amount owed based on $100,000. However if the employee’s compensation changed in 2008 to be $80,000 and the company deposited $20,000 into an HSA, then the source deductions would be reduced to reflect the amount owed on $80,000 as the $20,000 HSA contribution would be a tax-free benefit.
Every few weeks, I will be showcasing a different advantage of owning a Health Spending Account in this segment called…
HSA Advantage….
Taxes, we all have to pay them. Last week, I received all of my paperwork for the newly incorporated Gremolata Media Group Inc. What a stack of forms! Of course, one of the first things I noticed was the tax remittance forms…which made me think about the Health Spending Account and how simple it is to deduct as a business expense for the corporation.
If you own an incorporated entity, whether it is a global conglomerate or simply a corporation of one, you can open a Health and Welfare Trust (HWT) to cover your medical expenditures. If you are not incorporated, you can open a Private Health Services Plan or PHSP (see below). After my first wave of forms from CRA, I now understand why so many business owners love their HSA. Their is no annual paperwork! The deposits into the HSA are a business expense – nothing more, nothing less. You do not need to fill out any complex forms or ask for a special return from CRA, you simply add it as a debit to your books for the amount deposited into the employee’s health and welfare trust. The money is non-taxable for the employee, so you do not need to account for it on their compensation or make complex changes to their T4.
As for PHSPs, the story is a bit different. It is still a relatively easy process. On your annual return as an unincorporated sole-proprietor, you simply enter the amount you contributed into your PHSP on Line 9270 – Other Expenses.
When you think about it, the process is pretty simple. Certainly one of the easier items to report to CRA in terms of business expenses – versus mileage, leases, rent, interest earned/paid, or investments. So, why doesn’t everyone have an HSA??
OK, I had to do it. Three days into my blog and I have to write something about a celebrity. Anyways, I woke up this morning and the first thing I heard on the radio was Britney Spears being admitted to a hopsital after being rushed from her home by ambulance and escorted to Cedars Sinai by nine police cars. That’s right folks, nine police cars! While it did make for some interesting morning news with my Starbucks, the work-a-holic in me said…“Yikes…Who is paying the bill for this one?” .
If I was responsible for Ms. Spears’s personal health insurance policy, I would have been fired long ago. Of course, if she is financing this personally, the cost must be obscene! I did some research, and here is what this could have cost using some basic fee guidelines in California and advice from a doctor in Palo Alto…
Getting There…
- Cost for ambulance transportation varies by distance, typically $800-$1000
- Cost for police escort if available, no charge unless asked for and contracted as a special service in advance.
At the Hospital…
- For urgent, comprehensive evaluation by emergency physician: $500
- Hospital charges for nurse evaluation, use of the room: $500
- If an IV is needed: +$250
- Drugs vary widely and depend on whether the doctor orders a tradename drug or a generic preparation: $20 – $200 for drugs
- Observation time in the emergency department : $250/hour
- Evaluation by Psychiatrist in the ED: $300
- Costs for Psychiatric evaluation and counseling for 2-3 days…If an inpatient, then $250 per session for the psychiatrist
- Costs for private hospital room for 2-3 days, varies widely by hospital — $1,000-$3,000/day for the facility charges
- Average inpatient hospital stay in ICU ~ $8,000-10,000/day
Now, listen clearly. I am not saying that this is what she will experience over the next few days. However, if this was your typical visit to the hospital and you underwent what the media is reporting over a period of 2 days, then you would be looking at a bill somewhere between $29,000 and $32,000 USD!!!
My point here is that healthcare in the US is expensive, even for a celebrity. The second thing I would like to remind Canadians about is that not all of the bogus bill outlined above would be covered by medicare here in Canada. Many of these items, including private hospital rooms and even ambulance transport, would have been billed to your private insurance (if you had any). And if this was claimed through your insurance, you can be certain that by renewal time, you would receive some form of premium increase.
What would be more sensible? An HSA using tax-free dollars of course. All of the items listed above (excluding the police car envoy) would be covered as eligible expenses through an HSA in Canada (and the US). Even if the funds in the HSA did not cover the total amount, the claim could be rolled over to the next year and future funds used to reimburse Ms. Spears as they became available. But hopefully, this will be the last time she needs to endure such an expense.
In all seriousness, I certainly hope this is the last time I wake up to such a sad story about something so preventable.
For Canadians, the rising loonie has been a big news story for the past few months. Consumers are flocking south to take advantage of the at-par currency to buy cars, stereos, TVs, and clothing. But what about healthcare?
I was chatting with a friend of mine the other day and we were discussing the cost to attend some US-based high-profile wellness spa – you know, the ones the celebrities frequent. They had done some research and was surprised at how the cost was really no more than a basic all-inclusive stay at a 5-star resort. It got me thinking…“Is a week in Arizona at a medical wellness spa an option for me in 2008?”
I have a health spending account, actually, a Health and Welfare Trust (HWT) through Benecaid. I have barely used it (with the exception of some massage therapy and a new pair of glasses) and have saved up some considerable money. I certainly have enough for a week at Canyon Ranch or another medically licensed spa – should I take advantage of it?
A year ago, I would never have thought of spending my money on such a trip. However, with the recent rise in the loonie, I am seriously considering it. Given that the programs at these spas are overseen by medical professionals and that the transportation to and from the location would be eligible medical expenses, I am starting to think a medical getaway is right for me. I work hard and never take the time to look after myself. A week away focused on my physical and mental health and well-being might be a good choice in 2008.
I wonder how many other HSA holders are thinking the same thing?
