February 28, 2022
I also cover this in a YouTube video. Click here to watch!
Let me ask you something – why are you paying for healthcare costs out of your own pocket, when you can have your corporation pay these expenses?
Get ready, friends, because I’m about to give you ALL the necessary information you’ll need to consider setting up a Health Spending Account in order to protect you and your family. Essentially, you are turning Personal Costs into Corporate Tax Deductions.
A professional who has a corporation is like any other business owner who is challenged with how to pay for drug, dental and extended healthcare costs – both here in Canada, and when traveling for vacation or business outside of Canada.
If you do not have access to a group plan through your spouse, you will have to pay for these expenses out of pocket using after-tax income. This is where a Health Spending Account or HSA would be of great value to you and your family. Once you’re no longer paying for these expenses personally, all you need to do is to set up an HSA. Any contributions by your corporation are 100% tax-deductible to the corporation, while all eligible medical and dental expenses are reimbursed to you and your family tax-free.
HSAs are less expensive than group insurance policies. With group insurance plans, the costs are based upon the previous “experience” in terms of claims filed, plus the insurance company’s fees and profits. And, the more you use a group plan, the higher the renewal costs down the road. It’s kind of like they don’t want you to use the group plan because they will penalize you if you do… Why do that?
So, what is a Health Spending Account?
Well, an HSA is a self-insured Private Health Services Plan set up by the employer – that would be you as the owner of the company – as a benefit for their employees. An HSA provides expanded medical and dental coverage to professionals and business owners, their families, and certain employees.
How Does a Health Spending Account Work?
Great question. From a visual perspective, picture a health spending account like a type of piggybank for your drug, dental, and extended healthcare needs. Money deposited by your corporation can be used to cover all CRA-approved eligible personal medical expenses. As I mentioned previously, all contributions are 100% tax-deductible to the Corporation, and they are 100% tax-free to the employees.
An employee pays for the health or dental service upfront and then submits the expense to an automated claims process by visiting my website at MoaklerWealthManagement.com. Once the expenses have been submitted and verified, the money is then deposited into their personal bank account of file approximately two to three business days later. You do not need to mail in any paperwork, but the plan does call for you to keep your receipts in case of an audit by CRA.
An HSA can be set up for a 1-person business or multi-employee corporation as a cost-effective alternative to an insured drug and dental plan.
If you’d like more information on how you can set up an HSA plan with us, please send me a message via my contact information at the very bottom of this post.
How is a Health Spending Account Funded?
Another great question!
When you are initially setting up the HSA, you have options. You can contribute a lump sum upfront, you can turn on a monthly contribution, or you can do BOTH. If you have some idea of what your health and dental care expenses are going to be over the next year, you can contribute this amount (plus a small service fee and taxes) as a lump sum and then decide if you also want to turn on a monthly contribution.
If you initially decide to only go with a lump sum contribution, then you can only add additional money to the account on your anniversary date or if you experience a “life-changing event.” Because of this restriction, I usually encourage my clients to make an initial lump sum contribution as well as a monthly contribution. You can always turn off the monthly contribution at any time later on.
Who is Covered Under the HSA?
The definition of dependents for an HSA is more flexible than in a traditional plan. That means that any person related to you by blood, marriage, or law who is financially dependent on you can be covered under the plan.
It is becoming more and more common for children to either return or stay home after graduation from post-secondary school. As well, there is an ever-increasing trend for people to pay for the healthcare costs of their elderly parents who might not be covered by a government program. And if you don’t spend all the money in the plan this year, then it continues to roll over and can be used to cover medical expenses in subsequent years.
I have a couple of client examples here.
The first is one whose father was visiting a country on the other side of the world and he felt ill. He had to pay to see a doctor and then he was prescribed a prescription. Upon his return to Canada, both the cost to see the doctor and the prescription were covered under the HSA plan.
This other example comes from a client who didn’t know if he needed to put $14K or $15K into his plan for the upcoming year, so he did a lump sum of $10K and then turned on a monthly contribution of $500. 4 months in, he determined he had enough money in the plan and was able to turn off the monthly contribution. Once he turned off the monthly contribution, he couldn’t put any more money into the plan until the anniversary year of the plan.
This key difference is one of the reasons why the HSA plans that we set up are covered under the CRA guidelines.
Be careful out there because the CRA is clamping down on HSA plans that are called “Cost-Plus” plans and so they should be. Picture this, you have a $10K medical expense, you pay for it personally, and then you submit the expense to your corporation for a full refund… If you have this type of HSA plan, then the benefit would be considered a “taxable shareholder benefit”.
I am licensed in a number of provinces; in British Columbia, Alberta, and Ontario, the HSA plans that I see for a number of clients are using a “cost-plus plan,” but they haven’t been claiming the benefit on their personal income tax return. The CRA is starting to come down on this.
There is a level of risk involved in the way we design our HSA plans, so again I reiterate that the contributions you make are 100% tax-deductible to the corporation and 100% tax-free to the beneficiaries of the HSA plan.
If you’d like to learn more about whether you can take advantage of an HSA plan, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.
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By John Moakler, BMath, CFP, CLU
President and Senior Executive Financial Planner
Moakler Wealth Management
1 416 840 8544