PreTax Health - Your Questions Answered

What is a Health Spending Account?

In Canada, A Health Spending Account is a tax-free benefit that a corporation (as an employer) provides to employees and their dependents. Company owners are included if they are also employees of the company.

A Health Spending Account can be used on its own, or in conjunction with an existing health insurance plan (to cover ‘out of pocket’ health expenses and to provide access to a broader set of health care services that are not covered by traditional plans).

Some providers use the term PHSP (Private Health Services Plan) when referring to a Health Spending Account; PHSP is in fact an umbrella term, and a Health Spending Account is only one type of PHSP.

What is a Private Health Services Plan (often referred to as a PHSP)?

PHSP available in Calgary, Vancouver & Toronto (and all area between)

Many providers of Health Spending Accounts don’t use the name Health Spending Account at all, but simply call these plans PHSPs or Private Health Services Plans. This confuses the issue. The term PHSP or Private Health Services Plan, is in fact an umbrella term that was coined by Canada Revenue Agency (CRA). It’s discussed in subsection 248(1) of the Income Tax Act, and further in interpretation bulletins such as IT-339R2. This simply defines the general term of Private Health Services Plan (PHSP) as a contract or plan of insurance in respect of hospital care or medical expenses. It goes on to say that a health services plan may take any number of forms and still qualify as a PHSP.

A PHSP must meet the following three criteria:

- It must be a contract or plan of insurance for hospital or medical expenses;

- The plan must only cover medical expenses covered under subsection 118.2(2) of the Act for medical expense credit;

- It must only cover eligible expenses of an employee, spouse, or partner, or dependent of an employee.

In other words, the term PHSP encompasses otherwise widely diverse types of plans. Essentially, CRA says “if you have a plan that meets all these various criteria for being a PHSP, then we’ll consider what the employer pays into that plan to be an expense, and we’ll consider the benefit to the employee to be non-taxable”.

Consequently, one can get widely different types of plans that are PHSPs. For example, some traditional monthly insured plans also qualify as PHSPs. What we provide is one specific type of plan, known as a Health Spending Account (HSA). Our HSA is also a PHSP since it meets all the criteria for a PHSP. (In other words; while our HSA is a PHSP, not every PHSP is going to be an HSA).

What is a Health and Welfare Trust or an HWT?

Some providers confuse the term Health Spending Account with a Health & Welfare Trust.

A Health & Welfare Trust is a different instrument entirely – it is a form of a ‘trust’ account. Actual money is paid into the trust account, often regularly, and that money is then subject to a strict set of trust account rules established by the government.

A Health Services Plan does not need to operate as a Health & Welfare Trust to be considered a PHSP.

Health Spending Account / HSA Costs: What are the costs for the PreTax Health Spending Account Plan?

Let’s first consider the costs of NOT having a PreTax Health Spending Account. Irrespective your tax rate, you’re then effectively paying the CRA a 40%+ “handling charge” on your out-of-pocket medical expenses! (See example below if you wonder why).

By contrast, this is what PreTax Health costs the employer:

A One-Time Setup Charge for new HSAs:

$99 + GST/HST
If you are moving from another HSA/PHSP, this setup charge is waived.
Ongoing Admin Fee: 10% for all adjudication, payment and administration of claims, plus GST/HST (taxes only on the 10% admin fee).

Compare this with the 40%+ “handling charge” you’re paying to the CRA; otherwise, it is a no-brainer!

Example with PreTax Health:

For a $500 claim, the employer would submit a payment of $500 + $50 admin fee + $2.50 GST/HST on the admin fee.

Note: You’ll be charged your province’s HST rate (only on the admin fee) if your company is based in one of the HST participating provinces. Otherwise, you’ll be charged the GST rate (only on the admin fee).

Example WITHOUT PreTax Health:

To pay for a $500 medical expense, the employer must remunerate $714 to the employee if the employee’s tax rate is 30% (70% of $714 is $500). This is equivalent to the employer paying a 43% “handling charge” on the $500!

Should I be incorporated to take advantage of a Health Spending Account?

Some providers will tell you “no” — but the REAL answer is: Yes: to take advantage of a Health Spending Account you MUST be an incorporated company – from a single owner company on up to a large corporation. This includes any incorporated company in Canada with the exception of the province of Quebec, which has separate legislation governing the taxation of health benefits.

What about Sole Proprietors?

Although some health providers say an unincorporated company can subscribe to a Health Spending Account, this is not consistent with the CRA criteria for an HSA. Most of the more reputable healthcare providers no longer support the practice of offering HSAs to unincorporated companies.

The CRA is clear. A sole proprietorship cannot legitimately subscribe to a Health Spending Account. The CRA lays out various criteria for a plan to qualify as a PHSP. One such rule is that the plan must be a “plan or contract of insurance”. This has a very specific definition: one party must indemnify another party against loss in respect of an event, the happening of which is uncertain.

In an incorporated company, the corporation indemnifies the employee(s) even if its only a single-person company, the employee and the company are two different entities or legal persons.

It is not possible for a Sole Proprietor to qualify under this rule, since a Sole Proprietor (wearing the hat of “business owner”) cannot indemnify him/herself wearing the hat of the employee; since they are legally the same person!

For example, if Fred H is a sole proprietor, then Fred H cannot indemnify himself against loss in respect of medical events, the happening of which is uncertain. On the other hand, if Fred H is the sole employee and owner of “Fred H Consulting Inc,” then it is quite possible for “Fred H Consulting Inc” to indemnify Fred H since the company and the employee are two separate persons.

The confusion probably arises because the PHSP rules explicitly refer to Sole Proprietors, and states that PHSPs are available to sole proprietors provided that all the other rules apply. Clearly, this cannot apply in the case of a Health Spending Account; however, Health Spending Accounts are only one type of PHSP. Notice, for example, that a sole proprietor (unincorporated company) can subscribe to a traditional monthly health benefits program (e.g., Blue Cross), as there can then be a contract of indemnity or insurance between the sole proprietor and the insurer (e.g. Blue Cross).

These same limitations do not exist with incorporated businesses. A corporation is a separate entity which can indemnify an employee-owner.

Besides the obvious Health Spending Account benefits you obtain by incorporating, there are numerous other benefits you can realize from incorporation. If you are not already incorporated, we encourage you to download and read one of our Free Reports entitled “8 Ways to Reduce Your Taxes 30% or More,” where we identify seven compelling reasons to incorporate.

At PreTax Health, we determined that our plan should be as compliant with CRA rules as possible, so a lot of money was spent on having a Top 5 international consulting company go through our operational procedures and the CRA rules with a fine tooth comb. This showed that Health Spending Accounts cannot be provided to Sole Proprietors.

Are there age limits to participate in a Health Spending Account / PHSP like the PreTax Health Medical Plan?

There is no age limit for employees as long as the employee is still actively working for the company. Also, as long as they are still working, the Health Spending Account coverage extends to their spouse and immediate family members.

A company will typically specify “cut-off” ages for children. For example, non-students are covered before they turn 21, while full-time students are covered before they turn 25. The employer determines these cut-off dates.

How can an incorporated company benefit from the PreTax Health Spending Account (HSA)?

Costs for medical benefits provided to employees (or employee-owner and immediate family) come out of pre-tax earnings thus reducing overall taxable income. Example: If a company earns $200,000 in a given year and spends $20,000 on employee health benefits, taxable income is reduced to $180,000.In addition, the benefit is tax-free for the employee.

Employees always have out-of-pocket medical expenses, even if they have a traditional monthly insured plan. If you are not providing them with a Health Spending Account, they use their after-tax money (e.g. salary) to pay these out-of-pocket expenses. Since they have to pay tax, you have to pay them *more* in salary than you would have had to pay to the Health Spending Account to reimburse those expenses tax-free. Without a Health Spending AccountWithout a PreTax Health Spending Account in Canada, you may be losing an average of $7 per person per business day – the equivalent of a one-week destination vacation for each employee – every year. This is money you would otherwise pay to the Canada Revenue Agency — money which cannot be recovered in any other way except by a Health Spending Account. (Some believe you’ll get it all back when claiming it on your tax return — this is incorrect).

If a small corporation subscribes to a traditional monthly health benefits plan, typically, for every $100 incurred toward a plan on average, only $70 will be paid back to the employee, especially for routine expenses. On the lower end, healthcare insurance providers actively work to maintain a 30% margin, and the more your employees claim, the higher the group premium will become. In addition, the insurer places many restrictions on what is covered and the percentage of coverage (for example, they may only pay the employee for 70% of dental claims up to a certain amount per year). While a traditional monthly health plan can offer good protection against catastrophic events (i.e., with Accidental Dental coverage, coverage of premium prescription drugs, and private nursing care), on the smaller end, these plans are not cost-efficient for scheduled health care services. A Pretax Health Spending Account has no monthly fee; a company only pays for expenses. The full benefit of the health care expenditure goes to the employee vs. 30% or more toward an insurance company’s profit. For smaller corporations, the net saving can be 20% (30% less the traditional 10% admin fee charged by Health Spending Accounts). In addition, with PreTax Health, the smaller incorporated company has complete control over setting the expenditure limit it is willing to support – the system even reminds the user when the health balance is below a certain threshold and needs to be topped up. Under a Health Spending Account, any legitimate health care expense is 100% covered (as long as Revenue Canada lists it as an eligible expense). Visit our ‘Resource Center’ and click on the link to view a comprehensive list of all the healthcare services covered by a Health Spending Account.

Employees view a Health Spending Account as a valuable employment benefit – it can contribute to employee satisfaction and encourage employee retention.

A Health Spending Account is complimentary for organizations, especially larger ones, with a monthly health benefits plan. There are at least three reasons for this:

An HSA can reimburse many expenses only partially covered by a traditional monthly health plan
Non-traditional coverage that is not accessible through a traditional monthly health plan is often 100% reimbursable with an HSA.
Suppose an employee has unused HSA expenses. Their spouse has a traditional monthly plan with another company. In that case, both the monthly premiums and the uncovered expenses from the spouse’s plan can be run through the employee’s HSA.

How can employees, owners or immediate family members benefit from the Health Spending Account / HSA provided by PreTax Health?

Employees and their dependents receive tax-free reimbursement of their health care expenses at no cost to them. With many employer-provided group health plans, employees are often asked to contribute a percentage of the plan’s monthly costs.

Health and Dental benefits are not restricted as they are in monthly individual or group health plans. Employees, employee-owners and immediate family receive 100% coverage on a full range of health care benefits as defined by the CRA. As long as a licensed practitioner provides health care, there are few restrictions. It even includes braces, laser surgery, prescription sunglasses, chiropractic, registered massage therapy, Dr Bernstein, etc.

As a company, can’t I adjudicate my Health Spending Account claims?

No. Under CRA guidelines, an independent 3rd party service must be used to adjudicate Health Spending Account claims. The 3rd party must be thoroughly trained and follow CRA guidelines.

Further, the 3rd party adjudication service must maintain strict privacy in processing and viewing the claim information for company employees. It would violate health privacy legislation if an employer were allowed to view the medical information of one of its employees.

Comparison of Health Spending Accounts: What are the advantages of the PreTax Health Medical Plan over other Health Spending Accounts / PHSPs

Here is a summary of the unique benefits of PreTax Health:

PreTax Health offers multiple unique benefits for your company:

Complete payment flexibility and control — prepay or pay-as-you-go– with seamless change as your needs change.
Only with PreTax Health does a company have the ability to choose either Credit Carry Forward, to carry forward unused health care expenses, or Expense Carry Forward (see next FAQ for further information).
Minimize Plan Administrator’s Time — provides a full set of tools to manage and control health spending costs, allows employees to manage their claim details online, and eliminates the extra admin and time associated with managing ‘Black Out Periods’ — there are no more periods where claims need to be held for 3+ months.
Provides the capability to optimize the allocation of health care costs — the flexibility of easily managing benefit categories by employee type and the ability to allocate costs by department, division, etc.
Guarantee of compliance on claims adjudication and operating guidelines based on CRA guidelines.
Mobile Claims – now you can submit your claims by simply taking a picture of the health care receipt from your mobile phone (Android or Apple app.). Submit your health care claims in 10 seconds or less from anywhere. Imagine visiting your healthcare practitioner and submitting your claim for processing on your way out the door. This is a groundbreaking application; there is no equivalent in the industry.

Funding a Health Spending Account / HSA: How does the employer fund the PreTax Health Spending Account?

There are two broad ways in which the PreTax Health Spending Account can be funded:

• Pay-as-you-go: as claims are made, our automated system will automatically contact your company to request submission of funds.

• Pre-funding: your company can send a block of money that is held in an account, that will be drawn from as claims are processed.

PreTax Health is unique in that it supports either mode of operation — automatically. There is nothing special required, and you don’t even have to think about this explicitly if you don’t wish.

For example, even if you pay-as-you-go, if we end up not utilizing all of the funds (for example because a claim is gets adjudicated for less than the initial claimed amount), we will simply keep the remainder on account, and automatically apply it toward your further claims.

Companies wishing to retain a balance on hand can even specify a threshold: as soon as the claims volume suggests that the funding level will drop below that threshold, our automated system will notify your company.

Note: If your company keeps funds on hand with us, claims are often paid more quickly, since funds are readily available to support the payment process. For example, we do not have to await receipt or clearing of your company cheque.

What eligible health expenses can be claimed on my Health Spending Account / HSA?

Health expenses are generally eligible for reimbursement if they qualify as a medical expense tax credit under the Income Tax Act of Canada.

Examples of eligible healthcare expenses include:

Medical treatment by a licensed professional also includes massage therapy performed by a registered massage therapist and even Dr Bernstein’s Weight Loss program (since the services are administered by registered physicians and nurses).
Dental and orthodontic treatments by a licensed dentist
Laser eye surgery
Physiotherapy
Out-of-country medical
Acupuncture
Unpaid spousal benefit coordination
Prescription medication (a DIN and RX number are required) - this includes prescription sunglasses

General Services:

Any service performed by a qualified medical/dental practitioner, including but not limited to the following:

Acupuncturist, Chiropractor, Cosmetic Surgeon (some conditions apply *), Dermatologist, Naturopath, Obstetrician, Ophthalmologist, Optician, Orthodontist, Osteopath, Physician, Plastic Surgeon (some conditions apply *), Practical Nurse (for medical services), Psychoanalyst, Registered Nurse, Surgeon, Chiropodist, Christian Science Practitioner, Dentist, Gynecologist, Neurologist, Oculist, Optical (all services), Optometrist, Orthopedist, Pediatrician, Physiotherapist, Podiatrist, Psychiatrist, Psychologist, Speech Therapist, Therapist

If you have further questions on what is covered, consult our adjudication team at National Health Claim.

They can be reached at 1-866-342-5908 or by email at support@nationalhealthclaim.com

Do you offer Group Insurance, Lifestyle or Flexible Spending Accounts, and other specialized products?

Yes, besides a PreTax Health Spending Account, our partner National Health Claim offers a full array of Group Insurance, Lifestyle Spending Accounts, and other specialized products. These products can often be combined in different ways with your PreTax Health Spending Account. Here are a few links with further information on partner's products:

https://www.nationalhealthclaim.com/lifestyle-spending-account-detail/

https://www.nationalhealthclaim.com/mix-and-match-account-detail/?et_fb=1

https://www.nationalhealthclaim.com/corehealth-plan-detail/

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