A Private Health Services Plan (PHSP) is a tax-free vehicle for financing the healthcare costs of employees. They were introduced in 1989 by Canada Revenue Agency(CRA) in their interpretation bulletin entitled IT-339R2.   Today, they are one of the most popular forms of health spending accounts in the Canadian market.

Family Tree – A Branch from the HWT

In 1986, the Canada Revenue Agency introduced an interpretation bulletin entitled IT-85R2 – Health & Welfare Trusts for Employees.  This bulletin provided the basics for what would be known as a Health Spending Account or HSA to most Canadians. The original 1986 bulletin provided a tax-free vehicle for incorporated professionals and companies in the form of an HWT. Three years later in 1989, after pressure from non-incorporated entities, Canada Revenue Agency released another bulletin, IT-339R2 (Meaning of Private Health Services Plan), providing details on the concept of a Private Health Services Plan or PHSP for non-Incorporated businesses in Canada.

The PHSP resembles the HWT in many ways – particularly when it comes to the requirements for establishing a PHSP. These requirements are as follows:

(a) The funds of the PHSP cannot revert back to the employer or be used for any purpose other than providing the health and welfare benefits for which the contributions are made;

(b) The employer’s contributions to the fund must not exceed the amounts required to provide the benefits;

(c) The payment made by the employer cannot be made on a voluntary or gratuitous basis. In other words, once the payment plan is established it cannot change during the policy year. The contributions must be enforceable by trustees should the employer decide not to make the payments required;

(d) The trust is a legal arrangement between the employer, with a third-party acting as the administrator and an independent trustee. The expenses to be paid out of the trust must qualify as medical expenses as defined by CRA (specifically subsection 118.2(2) of the Act).

Participation

A sole-proprietor can establish a PHSP with a third-party administrator. If the sole-proprietor is an individual, they may open a PHSP for themselves and their family members. If the sole-proprietor has employees, they must offer a Health and Welfare Trust to the employees and a PHSP for themselves as owners. Additional limitations exist for the sole-proprietor in terms of contribution maximums if they have employees so it is recommended that most individuals research and use a firm specializing in PHSP and HWTs in order to be 100% compliant with the IT bulletins from Canada Revenue Agency .

Funding

The employer shall make contributions to the PHSP for a “plan year” in an amount, which together with employee contributions, if any, are required to provide the benefits under the plans to eligible employees of the employer and their dependants. Each employee shall be allocated a “plan year” not to exceed twelve months. The employer must follow the rules for funding outlined for a PHSP whereas the employees may be provided with a HWT. The amount contributed must be reasonable given the employment services performed by the employee.

Annual Maximums– Since the PHSP is designed for self-employed individuals or unincorporated businesses, the PHSP limits annual maximums based on family size as follows…

$1,500 / sole proprietor $1,500 / dependent over 18 years old $ 750 / dependent under 18 years old

Example: A household with 1 sole-proprietor, a spouse over 18, and one child would be eligible for 2 X $1,500 PLUS $750, for a total of $3,750.

Forfeiture of Funds– Unlike the HWT, the PHSP also has limits in place for the length of time the funds can be used. For every dollar deposited into a PHSP account, the funds must be used within 24 months from the date of deposit, otherwise they will be forfeited to the administrator.

Eligible Expenses

For a list of eligible expenses, visit the making claims section of this site.