For more than a decade, I have helped small business owners find an affordable and comprehensive way to pay for their medical expenses. By small business, I mean an owner/operator corporation or a business with one or two employees at arm’s length. This article will explore what to consider for health insurance when owning a small business in Canada.
For incorporated professionals, contractors, and consultants
1. What options do I have for medical and dental coverage?
You have three options for paying your medical expenses:
Option I. Traditional medical and dental insurance
You pay a monthly or quarterly premium in exchange for coverage. Very often this option results in a feeling of “insufficient coverage for what I am paying for.” There are many exclusions, especially with regard to dentistry and vision. Insurance can be complex, expensive, and restrictive. Oftentimes, a company of this size (two employees) will not even qualify for an insurance plan.
Read about why a small business owner doesn’t need health insurance [The Truth]
Option II. No insurance/payment of out-of-pocket expenses
Many small business owners do not have health insurance because it is too expensive and coverage is poor. This means that they do not have any plans and pay their medical expenses “out of pocket.” Don’t feel bad if you find yourself in this situation; it is actually more profitable than having insurance.
Option III. Medical Expense Account (HSA)
The Health Spending Account (HSA) is an excellent health insurance alternative for this type of “family business.” It is a tool that allows you to pay 100% of your medical expenses through your business instead of paying for them personally. This means that you and your business can save a lot of money on taxes.
2. What exactly is an HSA?
In essence, the HSA is a contract between you and your company. The contract is based on CRA guidelines that allow your company to reimburse you for medical expenses out of pocket. Refunds are 100% tax free for you and 100% tax deductible for your business. Basically, you can withdraw money from your business without having to pay income taxes.
3. Do I qualify?
You qualify for an HSA if you own a corporation, pay income taxes, and have medical expenses.
4. What can I claim with an HSA?
You can claim practically all medical expenses. You can find a complete list here.
5. How much does an HSA cost?
There are no premiums with an HSA. Costs will vary by provider. Here’s a good explanation of exactly how much HSA costs and how it will save you money.
Small business health insurance with 2 (or more) employees
A viable option for this type of business is also the HSA.
The HSA will have some differences compared to the “family” business described above. Due to the tax planning nature of an HSA, the fundamental way it operates changes when the corporate structure changes. This makes sense, as you are now looking for a solution from two perspectives: that of the owner and that of the employee. The important issues here are cost control, plan design, and what’s covered. Think of an HSA under this guise as an employee benefit plan.
With an HSA, there are no premiums. The employer decides how much is available to put into a benefit plan. Benefits are based on budgets and what the employer would like to provide in the form of benefits for themselves and their employees. You can think of an HSA as a bucket of money that the employer provides to employees. Employees use their individual benefit group to claim all of their health and dental bills, up to their benefit group limit, set by the employer.
The employer is also included and makes use of the plan in the same way, assigning its own benefit group limit. Claim refunds paid out of employee benefits groups are tax-free. Employee pay is a pre-tax expense for the employer. The employer pays nothing until the employee claims from her benefit group. This makes an HSA easy to understand, with all benefits available when and where needed by the employee and their dependents.
For more information on a medical expense account for your employee benefit plan, check out the 24 Most Frequently Asked Questions About Small Business HSAs.