Make Your Health Expenses Deductible to your Business

As a business owner, you take on risks and leave behind the security of things like health benefit plans when you decide to go off and start your own business. You can always purchase these health benefits, but for many small/medium-sized businesses, the costs of these programs can often outweigh the actual benefits received. This drives many of these owners to self-insure and hope that a health expense doesn’t come up.  When an expense does arise, the business owner will either pay themselves more salary or a dividend to ensure the surprise expense is taken care of which isn’t always tax efficient.

This is where a health spending account (HSA) can be an excellent tool.  It allows you an opportunity to use your business to self insure, and access less heavily taxed corporate dollars in the event a medical expense does arise with you or your family.

Here’s how HSAs work and how they can be a benefit to self-employed business owners.

What is a Health Spending Account?

A Health Spending Account (HSA) or Health Care Spending Account (HCSA), is an individual account with a fixed dollar amount set aside to be used by employees and/or their eligible dependents to pay for health and dental-related expenses not covered under their provincial health insurance or group benefits plans.

If a business owner is considered an employee of the business and earns an income, there is an ability to use an HSA to pay for your or your family's health care expenses and turn these expenses into corporate tax deductions.

How Do They Work?

Companies deposit funds into a notional account (The HSA).  Typically, you can fund an HSA to approximately 10%-15% of your personal income. For a business owner who pays themselves $100,000 of income, they can set up an HSA account for themselves and their family for as much as $15,000/year.

Anytime there is an eligible health expense, the employee or the business owner in this case will first pay out of pocket personally. Following his, they will submit their receipt for reimbursement.  Upon approval, the employee (business owner)will be paid the value of the expense tax-free from the corporation, shifting payment of the expense from the individual to the corporation.

Cost & Taxation

Most companies offering HSAs charge anywhere from 10%-15% on each claim.  As an example, if you claim $1000 worth of health expenses, the company will pay $1100. $1000 goes to the individual with the health claim tax-free, and the other $100 goes to the HSA provider.

The total amount the company had to pay in this example is $1100 which is fully deductible to the corporation for tax purposes.

Example

Let’s look at three ways a business owner can pay for an $11,000 family medical expenses: salary, dividends, or Health Spending Account.

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Option 1 - Salary

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Option 2 - Dividends

Option 3 - Health Spending Account

As seen in the example above, using an HSA for an $11,000 family medical expense means the business can save nearly $3500 versus paying it via salary or dividends. This is the result of being able to use less heavily taxed corporate dollars and being able to deduct the expense to the corporation.

Other Applications

Though not the focus of this piece, business owners can also use HSAs for their employees and reduce fees they may be paying for standard group health and benefit plans, which typically see their fees rise annually.  An HSA can offer more flexibility into what benefits the specific employee needs and not limit amounts toward specific services (an example would be only allowing $500 towards physiotherapy).

For employers who are maintaining their existing group benefit and health plan, but who have plans that don’t cover 100% of expenses (for example 80% dental), HSAs can be layered on top to provide employees with the ability to have 100% coverage for the things they need most.

Closing

HSAs are an excellent solution for business owners with no access to group benefits coverage either themselves or through their spouses. They can also be a good solution for owners who have health benefits that don’t cover 100% of expenses.

Health is one of those areas where when issues arise, you’re going to spend the money.  Paying a salary or dividends for high-earning business owners is not an efficient way to pay for these medical expenses. Instead, HSAs offer flexibility, are cost-effective and will help save you tax which makes for a much more efficient and simple way to pay for family health expenses.

- Brandt Butt, Portfolio Manager/Investment Advisor, CIM®

Brandt is a Portfolio Manager/Investment Advisor and part of an award-winning team at Endeavour Wealth Management with iA Private Wealth. Brandt’s focus is working with incorporated physicians and dentists between the ages of 35-45 who are looking to set themselves up on the right financial path in hopes of reaching a point where they are choosing to work, instead of having to.

This information has been prepared by Brandt Butt who is a Investment Advisor/Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained here in may not apply to all types of investors. The Investment Advisor/Portfolio Manager can open accounts only in the provinces in which they are registered.

iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.