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The Alberta government officially said goodbye to the health tax in their recent budget effective January 2009, joining seven other provinces and territories (New Brunswick, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Saskatchewan and Yukon) that don’t collect specific health premiums or taxes. These provinces fund healthcare out of general tax revenue.
So, what is an Albertan to do with their new found wealth? After all, each resident is looking at savings in the range of $528 per individual and $1,056 per family. It is a great amount to use on a new television or perhaps a BBQ for summer entertaining. But if they are self-employed, like so many other Albertans working in the oil and gas industry, they could be putting these funds into a Health Spending Account to maximize the return.
If you think about the money they are receiving back as part of their total budgetary spending, they could simply deposit the equivalent into a Private Health Services Plan. There are several HSA suppliers in Alberta who would be happy to take the money for them and in return, the taxpayer now has access to a reserve of funds to keep themselves and their family healthy. The big perk, they can double dip on the tax break they receive by making it yet another tax deduction for themselves as a PHSP. Brilliant!
I hope all self-employed Albertans will think about this as an option. It might be a small amount of money you are getting back, but it is still a great way to make it work for you long-term.
I was thinking about Health Spending Accounts, like I always do, and thought I would write a blog entry to clearly articulate the differences between HSAs and traditional insurance. I thought this would be a valuable tool for consumers considering an HSA over an insured plan. Here we go…
Insurance
Places limits on coverage to a defined maximum. Some plans allow you to have a higher limit for a higher premium.
Health Spending Account
There are no limits in terms of specific coverage. If you are incorporated and have a Health and Welfare Trust, the amount you can contribute is unlimited. If you are unincorporated, you are entitled to limits based on the number of dependents eligible from your Private Health Services Plan. Either way, you are not limited to a specific amount of coverage, you can allocate the funds to whatever healthcare costs you see fit.
Insurance
Requires a premium to be paid. This premium is equal to the true cost of claims plus 20-30% to allow for risk factored into the plan to ensure profitability for the insurer.
Health Spending Account
The premium is really a deposit structure equal to the true cost of claims plus 10% to cover administration of the plan. These costs are fixed.
Insurance
The cost of the premium is defined by the insurer and can be increased at their discretion based on claims from the previous year.
Health Spending Account
The cost of the plan is driven by the consumerand there are only increases if the HSA owner wishes to deposit more money into their account.
Insurance
The plan covers immediate dependents only such as spouse and children under age 18.
Health Spending Account
These plans cover any dependent related to the account holder by blood or marriage, regardless of age, as long as they are financially reliant on them in a given year.
Insurance
These plans may limit coverage to within Canadarequiring a supplemental travel policy for out of country health care expenses.
Health Spending Account
The funds in the account can be used to reimburse claims globally provided it is an eligible expense in their home province.
Insurance
The premium paid cannot be reimbursed and is lost at the end of the year. If no claims are made, the insurer keeps all of the premium.
Health Spending Account
The funds in the HSA roll-over to the next year and are not lost. Note: This applies to a Health and Welfare Trust. If you have a Private Health Services Plan the funds are lost after 2 years from date of deposit if not spent.
Insurance
The plans do not cover all procedures and drugs.
Health Spending Account
Funds in the account can be used to cover all drugs and treatments prescribed, dispensed, and performed by a medical practitioner including smoking cessation, fertility treatments, and elective surgery.
Insurance
These plans require basic medical underwriting and do not cover pre-exisitng conditions.
Health Spending Account
There is no medical required and the funds can be used to cover pre-existing conditions.
I am a bit of a looser when it comes to taxes and I am probably the first Canadian to submit their return each year. I always get a reimbursement cheque and immediately put it back into my investment portfolio. For self-employed Canadians however, there is a better option!
A smart place to put your tax reimbursement is always a Health Care Spending Account (HCSA or HSA). But what should you think about before putting your money into one? Well, if you own your own business that is not incorporated, you may want to consider opening a Private Health Services Plan (PHSP) this year. If you do, you should take a few steps to consider if this is a good option for you…
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Do a headcount of your family members. To determine your maximum PHSP allowance each year, you simply add $1,500 for each eligible adult over the age of 18 years and $750 per dependent under 18 years old. If it is you, your spouse, and your son, then you are entitled to $3,750.00.
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Top-up or Not? Take a look at your finances (high-level) and get a sense of how much money you will be getting back from your return. If you have a financial planner or broker, speak with them about topping up your RRSP contributions. They will have access to several calculators to help you determine how much your return could be if you “maximized it”. You may want to top-up to get the reimbursement to equal your PHSP allowance.
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Take a look at your family and business finances and decide if you can go a year without the reimbursement. Some families rely on their tax reimbursement each year, so deciding not to take it can be a bit of an issue. If you can live without the money and put off that trip to Disney World with the kids for the coming year, why not make it work for you next year?
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Be sure to send in your return to Canada Revenue Agency sooner than later. Why? The earlier you receive your reimbursement, the better off you are for next year’s deductions with your PHSP. The deduction for the PHSP is pro-rated, so you will want to start your contributions early in the year to get the full benefit. The faster you get your money back, the faster you can open your account. But remember, you can always simply open the account and fund it yourself until you get reimbursed – but why use your own money?
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Finally, determine the final deposit amount for your PHSP. This is done by calculating the difference between your maximum PHSP allowance (less pro-rated months if you are not early) and your return reimbursement. If you are getting more back from CRA versus your PHSP allowance, congratulations! If not, you need to look at how much your family needs for healthcare and whether or not you want to top it up with your own money. Remember, what you put into your PHSP is a full deduction for you (unlike RRSPs), so you may want to go the extra mile here.
Well, that just about covers it. If you do decide to use your tax return to fund a PHSP, remember that the strategy here is to use the funds to pay for your healthcare costs while making a sensible tax move. The money you deposit in the coming months will be 100% deductible off your 2008 return as a business expense. If you think about the same money going into an RRSP, you would never receive the full amount as a tax deduction. If you are going to be making regular RRSP contributions throughout 2008, why use your 2007 reimbursement to get a small lift when you could get a full lift from a PHSP?
It is the last week for Canadians to make contributions into their RRSP to take advantage of the tax-deduction for 2007. I myself have received numerous calls from my financial advisor reminding me to top-up my contributions for 2007 and letters indicating that my advisors will be available until the wee hours of the night to help me should I decide to add more to my investment plan. It makes me wonder, how many Canadian small business owners would put more into the RRSP each year if they could free up the extra money? Are they spent?
Financial advisors tend to focus on the after-tax money available to invest as opposed to looking at ways to free-up pre-tax dollars as a tool for investing. For many small business owners, the HSA is an unknown option. Each year, they take a few of their after-tax receipts and make a claim for the medical tax credit. A nice gesture from the federal government to reimburse for medical expenses but certainly not enough to give someone more money to invest. The reality is that if they had a Health Spending Account, they could be using the tax-savings to re-invest into their retirement plan.
Each year, some financial advisors look for ways their small business clients can contribute more without giving them any real options to free-up the funds to do it. To all my readers out there who are financial advisors with small business clients…get them an HSA today! Show them how they can make their current after-tax expenses into pre-tax business deductions. Show them how this will impact their taxable earnings and how they can use the savings to re-invest in their RRSP! Given the economic conditions and the tough time your clients have had this year, this is a great way to show them how resourceful you are in finding ways to build wealth for them using a readily available and sensible solution – the HSA.
Some more help on finding the right HSA for you in my series on items you should look for when choosing an HSA provider…
Mandatory Insurance
There are many Health Spending Account (HSA) providers in the Canadian market these days. I will not get into a name game over various providers but I did want to stress one major issue I have over how they package HSAs and their availability. Specifically, the issue related to mandatory insurance.
Don’t get me wrong, insurance is ALWAYS a good idea if you are using an HSA for your core benefits plan. The issue that is counter-productive is the requirement of many HSA providers when it comes to insurance. First off, an HSA is supposed to be a financing vehicle for your healthcare spending, not just a nice to have addition to insurance. Many providers will not allow you to have an HSA unless you purchase their core health insurance product. Why would they do this you ask? It is a cash grab. Most HSA providers use the HSA as a “nice to have” bonus to an individual health insurance product or combine the HSA into the overall plan itself. The issue here is that as an HSA owner, you have the right to choose the insurance product you want to buy and it should never be a conditional requirement to access the benefits of an HSA.
I, for example, have had a Manulife “Cover Me” insurance product for many years. It is my emergency back-up insurance should I ever need it. I have never made any significant claims and pay the low premiums purely for protection only. I also have a Benecaid HSA as an employee of the company. At the time, I could have opted to purchase Benecaid’s Premiere Plan product (in my opinion superior to Manulife), however I decided to stay with Manulife as I had been with them for many years and my medical history for pre-existing conditions would have remained intact by staying. Over the past few years, I have been able to claim my premiums to Manulife as an eligible expense from my HSA. The key thing to note here is that I used my HSA from one provider to pay an insurance premium for a product I chose to purchase from another provider. Choice is the key.
When an HSA provider requires you to purchase their insurance product with an HSA, it takes away the freedom of choice the HSA is supposed to provide as a core benefit. The HSA is your money and you should have the right to choose how it is spent. If you want basic insurance coverage, you should be able to select any provider you desire. The HSA allows you to tailor your overall health plan to suit your needs. When an HSA provider asks you to choose a specific insurance plan they represent, they are not acting in the best interest of the client.
If you currently have an HSA or are considering one, be sure to ask your HSA provider about any requirements related to a sponsored insurance product. If they only permit you to buy the product they recommend….buyer beware!!
Every few weeks, I am showcasing a different advantage of owning a Health Spending Account in this segment called…
HSA Advantage….
One of the biggest issues facing employers, both small and large, is the never ending increase year over year in the cost of their health benefits plan. Whether they are a global corporation or a sole-proprietor, the increases in annual premiums for health insurance is making a huge dent in the value vs. cost equation. Annual premiums are calculated at renewal each year by the claims incurred in the previous year. Since claims and overall costs continue to rise, pretty much every policyholder can expect an increase in premiums every 1-2 years. Luckily, the model for an HSA is very different.
When you establish a Health Spending Account, you make an assessment of your needs for healthcare costs in a given year. You may decide that you will spend a certain amount on predictable items like dental cleanings and massage therapy. You may also decide, and it is strongly recommended, to buy a basic insurance solution to cover the unpredictable events, like illness and drugs. The total amount needed to cover these costs is what you would then deposit into your HSA. The key here is limiting the claims you make against insurance and increasing the claims you make through your HSA. This model allows you to make claims without every dollar contributing to premium increases. As a result, you obtain a better level of budget certainty year over year as you have greater control of your spending and where it is being spent. Since you are using real dollars for 75% of the costs, assuming 25% of your HSA is reserved for drug-only insurance premiums, you have greater control on spending and can increase the contribution to your HSA or cost as you see fit.
When you think about the money you spend on your health insurance plan, most people would say that they have 0% control over the costs. With an HSA for the predictable claims and a basic drug plan for the unpredictable, you can at least gain control over 75-80% of you plan. I am sure you would agree that any degree of control and budget certainty is better than none!
Every few weeks, I am showcasing a different advantage of owning a Health Spending Account in this segment called…
HSA Advantage….
If you apply for insurance, one of the first things they ask you for is the list of dependents. Most people have had traditional insurance at some point in their life and so we all know that a dependent is basically your spouse, and children under 18-21 years of age. You can have a child as a dependent over age 21 with many plans however, they need to be enrolled in school full-time. Well, when it comes to Health Spending Accounts, you can kiss this goodbye!
Health Spending Accounts use a different model for determining dependents thanks to the wonderful people at Canada Revenue Agency (CRA). Because the rules for HSA delivery are tied to the guidelines related to taxes and financial dependents, an HSA allows you to cover a wider range of family members, not just the spouse and kids. In the CRA’s interpretation bulletin IT-339R2 Meaning of Private Health Services Plan, it clearly states that the funds may be used by the employee, the employee’s spouse, and any member of the employee’s household with whom the employee is connected by blood relationship, marriage or adoption. This means that in theory, an HSA should be able to cover a grandparent, an uncle, a sister, a nephew or anyone else in your family. Of course, to be a friend of CRA, it is recommended that if you choose to add one of these dependents, they should be financially dependent on you for support in the year.
The key point here is that you are not limited to your immediate family for coverage with an HSA. If you have an elderly parent who relies on you for financial support and care…use an HSA! If you have a brother or sister who struggles to care for their autistic son and rely on you for help…use an HSA! Got a university drop-out son or daughter at home who just won’t leave the nest…use an HSA!
There is no limit to how and who you can coverage with your HSA as long as you remain smart about the guidelines set by CRA. If they rely on you for financial support, then they can be your dependent.
Some more help on finding the right HSA for you in my series on items you should look for when choosing an HSA provider…
Classes Are Key
I received a call the other day from an advisor with questions regarding Health Spending Accounts. He had a client with a Health Spending Account at another provider and wanted to switch it over to Benecaid. I said sure and asked him how many classes were in the group. I heard silence at the other end of the phone.
It turns out that the client had set up the Health Spending Account for themselves and not for the other employees in the company. In theory, this is OK. The problem was that he did nothing to distinguish himself from the other employees in order to receive this benefit nor did he establish a fixed amount or maximum. This can cause issues for the Canada Revenue Agency, specifically when you need to explain that this is not a shareholder benefit. The key to clarity is classes.
The interpretation bulletins are for interpretation. This means that as an HSA owner, you should make every effort to show your interest in following the rules and using the gift CRA has given Canadians in a sensible way. Establishing classes in your company based on work roles and performance is a great first step to show that you are acting in good-faith. You do not need to offer an HSA to all employees, but you should always provide the benefit to members of the same class. Each class should have defined contribution amounts or limits reasonable to the work and compensation of the employees within the class. If you have a team of executives, of which one member is the owner, you should offer an HSA to the entire team. If you only have one owner in the team of executives, you should make a distinction as to why they are entitled to the HSA versus other employees. Establishing benefit classes, one for executives and another for administrative employees is a great start.
If you currently have an HSA or are considering one, be sure to ask your HSA provider about the establishment of classes If they don’t know what benefit classes are….buyer beware!!
Oh how I love thee Alberta, with your lucrative oil sands and snow-capped mountains. You shine across this great land with your quality beef, enormous shopping mall, and WestJet regional hub. You stay the course and never turn back on a decision…well, until yesterday that is.
In 1969, you jumped into the controversial world of health premiums by implementing a “user fee”, or friendly “here’s to helping you get better” tax. Albertan families paid an average of $1,056 a year in health premium taxes to the government last year alone. Your decision to change the course and eliminate them is a major reversal for a 37-year-old government that has resisted calls to stop collecting the much-loathed fees. Well, sometimes the message gets lost in the delivery and so we cannot blame you for not getting it earlier. After all, your neighbor British Columbia followed suit, as did Ontario. Could they be that bad a thing to have around? But why now Alberta? Why give up on something that has caused so much controversy for so long?
After all, you do have the highest number of incorporated professionals in the country saving money on personal taxes and the largest concentration of Health Spending Accounts per capita in Canada. Considering this, it would appear that taxes and healthcare are obviously not issues for Albertans. It certainly is an issue for Ontarians like me, but of course, we are still adapting to healthcare premiums and de-listed services. Give us a few more years and everyone in Ontario will be incorporated with their own Health and Welfare Trust. I wonder if Mr. McGuinty realizes this? It could be a budget balancing issue if everyone starts paying less tax through incorporation.
Oh well, at least we have those oil sands. Fort McMurray is just north of Sudbury, right?
Some more help on finding the right HSA for you in my series on items you should look for when choosing an HSA provider…
PHSPs With No Limits
If you are a sole-proprietor, you can open a Private Health Services Plan through most third-party administrators and insurers to finance your healthcare costs as well as insurance premiums. Most sole-proprietors are individuals (i.e. tradespeople, lawyers, hairstylists, etc..) while some are employee groups (i.e. smaller retailers, professional firms, etc..) One problem that is causing grief is the growing number of HSA Providers offering PHSPs to sole-proprietors and NOT following the rules in terms of contribution limits.
If you are a sole-proprietor (unincorporated), you may qualify for a PHSP up to an annual maximum depending on the structure of your family ($1,500 / sole proprietor, $1,500 / dependent over 18 years old, $ 750 / dependent under 18 years old). Some HSA providers have ignored this rule, clearly defined in IT-339R2 (Meaning of Private Health Services Plan). This can be a problem for small business owners with a PHSP. One, you may be placing more claims through an administrator than you are allowed to claim on your return, costing you more money in administration fees to the HSA provider. Secondly, your deduction may be offside if you are offering a PHSP to your employees as an unincorporated entity. So, what should you do?
First, look at your existing deposit schedule versus claims and compare this amount to the logical maximum you would be entitled to with a PHSP. If you are above the maximum, you should speak with your HSA Provider regarding options for reducing the amount. If you have employees, it is important to note that their funds should be residing in a Health and Welfare Trust and not a PHSP. Secondly, you should remember that as owner – you may only deduct your PHSP contribution or the amount of the smallest contribution made to an employee, whatever is lower. Many HSA Providers forget this and the last thing you want is an auditor pointing this policy out to you.
In summary, PHSPs are great as long as you follow the rules. When choosing an HSA Provider, be sure to ask them about their policy on PHSP maximums and over-funding. If you have a group, ask them how they structure their plans to accomodate multi-employee HWT requirements. If they are confused by your questions….buyer beware!!
HSA Information for Canadians 
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