Some may have heard of a Health Spending Account or HSA, but few know the absolute benefits to a small business owner.
When you leave employment to venture into your own business, you generally leave behind your ‘benefits’ package and suddenly find yourself with no health-care coverage. There is however, a very simple, very cost-effective and tax-effective solution-the HSA.
Most people are familiar with or have had ‘Group Insurance’ and hence are aware how the programs work. They are however Insurance programs and have limitations, restrictions and high risk of fee increases each year. A ‘typical’ group insurance program can cost a business owner $300-$400 per month for family coverage, and this coverage would have significantly low limits for dental, prescription drugs, hospital stays, etc., and would likely not cover eyeglasses, orthodontics, medical devices, certain therapy etc. Under an HSA, all of these items can be covered at a fraction of the cost, in fact, the savings under an HSA can be quite significant – consider the following example:
Jesse is a small business owner, has a spouse and 2 school – aged children. If their medical/dental expenses were $2000 per year, they would have to pay this with ‘after-tax’ dollars, therefore requiring gross income of approximately $3000 per year. However, only a small portion of the expense on for medical would be allowable as a tax-credit on their personal taxes. (medical expenses must exceed 3% of your taxable income before any is allowed for a tax credit) If they were to obtain group insurance, lets assume they paid $300 per month for coverage. Although some this would be deductible by the business as employee benefits, a portion of the plan would be a taxable benefit to Jesse, and the plan would have restrictions.
Now, let’s assume Jesse sets up an HSA for their family. By having the company contribute $200 per month to the HSA, Jesse would effectively have $2400 per year of ‘tax-free’ money to spend on virtually any medical expenses. The company would gain the benefit of a 100% tax deductible amount of $2400 per year.
As the money ‘belongs’ to Jesse, she may determine what expenses to submit for payment; orthodontics, eyeglasses, physiotherapy, contact lenses, prosthetics… and the list goes on.
There are other great benefits to an HSA as well:
Employee retention products; you can establish an HSA for your employees, setting the contribution amount at whatever you want – all employees do not have to be treated equally. ‘Bonus’ payments may be added to the HSA, incentive prizes etc. You can add an insurance component to your HSA – if someone experiences a catastrophic event, the insurance will pay when you exceed the value of funds in your HSA. You can add emergency travel medical to your plan – safeguard for when you are out of the country. One of the best benefits, completely unlike insurance, because the money is YOURS, you can carry forward any unused values at the end of the year to the next year – you do not lose any of your money. Setting up an HSA is not difficult, and generally only takes a couple of days. There is a small setup charge, however, the tax advantages as well as the health advantages far outweigh this fee.
Continuing with our cover story, lets look at the tax benefits of the HSA program for Jesse:
Assume Jesse earns $50k per year and her spouse earns $45k per year. They have family medical expenses of $3,000 per year. To cover the ‘after-tax’ cost of $3k, they would have to earn roughly $4,500 before taxes. Then, they would be entitled to a medical expense credit of only $251.62 The ending result, They still expended more than $4,000 of gross income to pay for their $3,000 in medical expenses.
On the other hand – if the company contributed to their HSA, $250 per month, they would be out-of-pocket $0. The company would realize a 100% tax deductible expense of $275 per month. (An HSA is a ‘costplus’ program that carries a 10% administration fee, paid by the company – the employee never has to pay a fee.) From the company perspective, as they have a tax deductible expense of $3,300 per year, assuming a corporate tax rate of 22%, the corporation saves $726.00, therefore, the actual ‘cost’ to the corporation is only $2,574 to give Jesse the BENEFIT of $3,000 per year in FREE medical costs.
HSA’s are not only for Corporations, a sole-proprietor can also realize an even greater benefit – if their marginal tax rate is greater than 22%. The business receives 100% of the tax deduction, whereas personally, the individual would only be entitled to a small non-refundable tax credit.
CRA, in recent Tax Information Bulletins, completely endorses Health Spending Account Programs, get yours today and give your family the medical peace of mind you deserve, and start saving your hard earned money.