Private Health Service Contracts

rivate Health Service Plans (PHSPs) have been around for a number of years, yet people are still unaware of the great tax savings and potential benefits that they offer.  

The Government of Canada initially recognized a serious problem whereby many self-employed individuals and small business owners could not afford to provide health benefits to their employees or even their own family members. Since then the government has introduced incentives in the form of tax deductions to enable small to mid-sized business owners to sign up for PHSPs. These plans allow business owners to provide their families, employees and any dependents with health and dental benefits at a fraction of the cost of your typical benefits plan. The business owners gain the ability to convert their family’s personal health and dental expenses into tax deductible expenses for the business, resulting in significant savings in the form of tax dollars.

Following is an example of the tax savings achieved by a self-employed individual. Let’s assume Johnny Cashman is in the 40% tax bracket and had incurred $2,000 in family medical expenses in the year. Without a PHSP, Johnny could not claim any of these expenditures to reduce his taxes (the Medical Expense Tax Credit only applies to medical expenses in excess of $2,000). However, if Johnny signed up for a PHSP, he would be able to claim all of his $2,000 in medical expenses against his income to reduce his taxes by $800 (40% x $2,000). While most PHSP carriers charge an administration fee on any claims submitted, this amount is nominal when compared to the tax savings made available through these plans. Note that the administration fee is also tax deductible.

When comparing your options for benefits plans, there are several factors that you should take into consideration. Primarily, you must look at the coverage that is being provided and its cost.

Flexible Coverage

Most benefit providers are fairly limited in the type of coverage that they offer, particularly with basic benefits plans. My previous benefits package provided through an insurance carrier limited my annual claims to $500 for massages, $1,000 for dental work and nothing for eyeglasses or contact lenses. PHSPs do not impose such limits or restrictions on their plans, making them a more flexible alternative. Rather, PHSPs allow you to deduct anything that qualifies as an eligible medical expense, which is defined by the Canada Revenue Agency on their website. (You can also get a detailed list from www.atlanticbenefitsplan.com/expenses.)

While PHSPs often cover more items than a typical benefits package, they do not include long-term disability or travel insurance.

Pay-As-You-Go

Even the most basic health and dental benefits plans can be expensive when you are paying for them out of your own pocket. While some do provide quite extensive coverage, you should ask yourself whether the coverage provided will exceed the cost of the annual premiums associated with each plan. More often than not, this is not the case.

PHSPs are a cost effective alternative to your typical benefits plans as there are no annual premiums and you only pay an administration fee when you actually incur an expense. This works really well from a cash-flow perspective as many PHSP providers allow you to fund these accounts on a pay-as-you-go basis. Thus, if you had no expenses to claim in the year, then you would have no expense relating to your coverage for the year either.

Self-Employed and Small Businesses

Furthermore, corporations that cannot afford a regular health plan can usually work directly with PHSP providers to create customized plans that fit a company’s budget. This can help small business owners to control their costs while keeping competitive by providing benefit plans to their valued employees. Most PHSP providers work within your budget and provide coverage tailored to your needs.

Insurance plans typically limit your claims period to begin from the start date of your plan whereas PHSPs may provide more flexibility in this respect. Most PHSPs will allow you to claim an expense so long as it was incurred within any 12-month period ending within the businesses fiscal year. This flexibility may allow you to claim an expenditure that was already incurred prior to setting up your PHSP.

While the needs of every person will certainly differ, PHSPs are perfect for self-employed individuals who do not have a benefits plan or small corporations that wish to provide coverage to their employees and/or family members without having to fork-up the hefty bill associated with a benefits package.  

There are a few good PHSP providers across the country. Since we have found out about this tax savings strategy, we have set up clients with Atlantic Benefits Plan and have had good experience working with them thus far.

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Junaid Usmani is the tax partner at SRJ Financial Chartered Accountants in Toronto, Ontario. He has a Masters in Taxation. E-mail him at junaid.usmani@srjca.com