(Originally published by Surrey Business News.) A not-so-new benefits vehicle gaining traction in recent years is the Private Health Services Plan (PHSP). While PHSPs have been available to Canadians as a tax-advantaged health expense product since the mid-1980s, they've suffered from a knowledge gap and many professionals are unaware of the opportunity. Although "PHSP" is their technical tax name, they are most commonly marketed as "Health Spending Accounts." For largely financial reasons, HSAs are surging in popularity. Whether as an alternative or a supplement to a traditional benefits program, HSAs offer outstanding advantages for both owners and employees - with some corresponding disadvantages.
For business owners, HSAs are essentially a CRA-approved way to transform after-tax personal medical costs into a fully tax-deductible business expense. All costs are funded by the business using before-tax money, providing a 100% tax write-off for the owner and a non-taxable benefit to employees. People often ask "And this is legal?" - but there's a clear logic. In a conventional plan the employer pays a tax-deductible monthly premium for protection against potential medical and dental costs; an HSA turns these same expenses into the tax equivalent of a premium paid only after a medical or dental cost is incurred, on a fee-per-claim basis.
For small business owners frustrated with the inflexibility and limited options of traditional plans, the HSA platform provides affordable access to tax-advantaged coverage for personal medical and dental expenses. If you don't yet have traditional benefits and you're worried about affordability but want a potent tax-saving and retention tool, an HSA might be the right place to start. The best candidate for an HSA is an incorporated business.