If your business is growing rapidly and you’re looking to hire new employees, it might be time to consider offering health benefits. But, finding coverage that is cost-effective and flexible can be difficult. A Private Health Services Plan (PHSP) is a budget-friendly option that provides tailored health coverage for both employees and their dependents, as well as for you and your dependents. In this article, we’ll explore what a PHSP is, how it works, and help you decide whether it’s the right fit for your business.
What Are Your Options for Health Coverage?
Group Insurance
One option is to look at traditional group insurance plans through an organization such as Blue Cross. However, these plans may require a substantial premium to provide the level of coverage that you’re looking for.
Unless you’re an extremely large employer that allows employees to pick their benefits, group insurance generally provides a set list of what is covered at a fixed cost. In these situations, there will always be employees who aren’t satisfied with either the coverage (i.e. it’s not broad enough) or the cost (i.e. they’re paying premiums for coverage they don’t need).
Private Health Services Plan (PHSP)
Another option is a PHSP. These can alleviate some of the issues presented by traditional group insurance plans.
For example, a PHSP allows employees to choose the medical services they require while offering the business certainty as to its costs. They’re easy to understand for both employees and employers.
What Is a PHSP?
A PHSP is a cost-effective way for you to provide employees with health benefits. Regulated by the Income Tax Act, this plan converts all healthcare expenses into tax-deductible business expenses. For small businesses, proprietorships, and partnerships, having a PHSP can help you, your employees, and their families save money – and can even attract new talent.
Several conditions must be met in order to qualify for a PHSP, which you can read on the Canada Revenue Agency’s (CRA) website.
How Does It Work?
Generally, a PHSP is set up through a third-party service provider. In this arrangement, you, the employer, contract with the PHSP provider to cover specific medical costs for your employees. Coverage amounts are usually based on the employee’s position within the company (e.g., up to $1,000 for a certain level of employee, up to $5,000 for another level). This typically operates on a ‘cost-plus’ basis, which means that you reimburse the provider for the actual costs of the covered medical expenses, along with an additional administrative fee.
The Process
When an employee incurs a medical expense, they initially pay for it out of pocket and submit the receipt to you. Then, you forward the expense amount, as well as an administrative fee (usually a percentage of the costs), to the PHSP provider. The provider will then reimburse the employee for the full amount of the medical expense and keep the administrative fee for their services.
This can also be done without a third party, with the employee submitting their expenses directly to you. However, this increases the administrative burden and has a greater risk of error.
Shareholders as Employees
It’s common for a company shareholder to also be an employee, and sometimes the sole employee. The CRA considers whether an individual receives benefits under a PHSP in their capacity as a shareholder or as an employee. If it’s determined that the coverage is received primarily because the individual is a shareholder, the benefits would be treated differently under the Income Tax Act, resulting in the individual receiving a taxable benefit. In this situation, payments made to the shareholder wouldn’t be deductible for the corporation. This can create a larger tax disadvantage which should be avoided.
Determining whether benefits are received by virtue of being a shareholder or an employee is based on fact. When there are multiple employees and the same coverage is applied to both shareholders and non-shareholders, the CRA generally considers the coverage as an employment benefit rather than a shareholder benefit.
When the sole employee is also the sole shareholder, or if all employees are shareholders, the CRA generally considers the coverage an employment benefit if it is provided as part of a remuneration package. This distinction helps ensure that the benefits remain non-taxable and that associated costs are deductible for the corporation.
Consider What’s Best for Your Business
A Private Health Services Plan may not be the perfect solution in every situation. But, depending on the types of benefits you want to provide and the number of employees you have, a PSHP can be an extremely useful tool and is worth considering.
This article deals with complex matters that have not been addressed in full and may not apply to your particular facts and circumstances. As well, the matters presented and the references contained in the article reflect laws and practices that are subject to change. Please consult a tax advisor for advice about how the above information should be applied.
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