Employee benefit plans are table stakes when it comes to attracting and retaining talent in today’s business world. But there are a lot of common complaints we hear about the cost, the options, and the types:
- No one likes a programmed benefit solution with a one-size-fits-all approach. Everyone gets the same benefits regardless of their personal need, leading to unused benefits that are being paid for.
- All employees need to take out the same benefits at the same cost, again regardless of their needs.
- Costs are killer. An employee benefit plan can be very expensive and either the company needs to pay 100% of the premiums (which is unaffordable) or the employees need to co-share the costs that is not efficient or tax beneficial.
- Employers have no control of increasing expenses. An insurance company may require as much as 30% or more as a profit margin to cover expenses (including commissions) and administrative costs (depending on the group size). Therefore only 70 cents of every dollar are allocated to claims and the balance for administration. Further, if your claims exceed expected use, your premiums next year can increase substantially.
Should you implement a Health Spending Account?
All of the above concerns are relevant, and sometimes there’s no clear option that will answer all your challenges. But one solution that is often overlooked is a Health Spending Account. This relatively simple concept can be a winning option for many smaller businesses.
What is an HSA?
Put simply, a Health Spending Account is a centralized pool of funds for use by employees of your company; these funds are flexible and can be used for a range of health services, not limited by specific amounts or specialties.
An HSA (also called a Private Health Services Plan) is a method to provide medical, dental and vision benefits in a tax efficient manner; it is Canada Revenue Agency-approved (when constructed properly). A corporation can write off 100% of the costs related to its HSA and all expenses are reimbursed tax-free to the employees .
Two key reasons why HSA’s are preferred by many small businesses:
- Costs are tax-deductible to the employer
- Claim payments are tax-free to the employee
Depending on individual corporate requirements, HSA accounts can be used to supplement current benefits to design the optimal cost/benefit solution or may be used as an excellent alternative to health, dental and out-of-county coverage.
How is a Health Spending Account beneficial to employees?
For an employee earning $50,000, the marginal tax rate will be 29.65% . So to pay $1,000 in health care claims, the employee would need to earn $1,248 pre-tax to pay the $1,000 after-tax bill. Saving $248.00 on their medical or dental bill allows your employee to access the same health services for their family but in a more cost-effective manner.
How does IP Private Wealth Help Business Owners?
IP Private Wealth is a wealth management firm that provides 360° financial planning for affluent families. Our family office model helps entrepreneurs to plan for growth, expansion, exit, and succession; we gather together a round table of experts from many disciplines, and together we create a coordinated action plan to drive you and your business forward. You can learn more here.
Executive coverage in Health Spending Accounts:
For business owners who are paid with salary as part of the total compensation program, a business can customize an executive HSA account that offers higher limits for they and their families, along with executive life and disability benefits for the business owner/executive.
Example: a business owner earning $300,000 could have an HSA plan for up to $30,000 (CRA standards are 10% – 15% of their personal income) .
That same owner can use this plan for health claims for themselves or dependents, and the same reprieve on taxes occurs for this owner. Without an HSA plan, that same business owner would have to withdraw ~$64,558 to pay for $30,000 of claims (assuming a 53.53% tax rate), and this would not be tax-deductible.
Editor’s note: please seek professional advice to avoid Shareholder benefit tax penalties.
Health Spending Accounts could be the future of benefits
In the past, a Healthcare Spending Account has been used only as a supplement to traditional benefit plans to provide coverage in specialty areas of care. Due to advances in technology, the HSA can now be offered as a core benefit to small companies, offering a flexible and cost-efficient benefit coverage option in a tax-effective manner.
With the HSA plan, employees can use the benefits how they need, when they need on the services they choose, to the annual maximum amount, and receive benefits on a tax-free basis.*
Further, with an excellent online program, the HSA is easily administered without undue administration costs to the employer that is often borne by the company.
Starting a Health Spending Account:
Talk with your business advisors, or contact our team at IP Private Wealth; we design plans with our business owner clients, and can enroll the employees as well. In addition, we can review your options for more affordable and user-friendly methods of providing employees with life, disability, and retirement planning.
*Subject to eligible expense rules outlined by CRA and to annual maximums established by the company.