Once again time goes by in a blink of an eye!
Continuing from my previous discussion – PHSA’s can be very beneficial for the one person company to a company with multiple employees…..
For the one person company(incorporated or unincorporated), the advantage of a PHSA is firstly your cash flow; instead of paying premiums to an insurance company month after month, whether you or your family uses the plan or not – with a PHSA you only pay for the plan when you use it. If you are someone who goes to the dentist once a year, rarely gets a prescription, and has little to no other expenses – why pay $50-$100 per month for an insurance plan? Sure the premiums are tax deductible, but you only get a percentage of that back. Save your money and pay for the dental visit when you need it – and deduct that just like you would premiums.
The other advantage is that you pay for these expense with pre-tax dollars as opposed to after tax dollars. Take a $1000 dental bill: if you had no plan you would have to pay yourself about $1500 (depending on tax bracket) in order to account for CPP, EI, and payroll tax so that you have $1000 left to pay the dentist. With a PHSA – you would simply pay $1100 out of your company account – saving you about $400!
Another great example I find is for major dental work such as crowns, orthodontia, bridges and implants – most individual plans do not cover this type of work, or if they do – you have to pay into the plan for 2 years before you can claim for your son’s/daughter’s braces. With a PHSA you can claim these expenses on day 1 of your coverage and therfore fully deduct this expense from your business income.
Finally, this plan is better than the medical tax credit that you have from the government for a couple of reasons – 1. With the gov’t tax credit you have to pay a deductible of 3% of your income (max. of $1925) before you are allowed to claim any expenses. This is where I find a lot of clients get confused – they tell me “My accoutant already writes off my medical expenses – why would I want a PHSA?” True, your accountant is writing it off – but the question is – are you getting any sort of credit? If you earn $50k per year – you would have to pay $1500 in medical and dental expenses to cover the deductible – if you have $1200 in expenses – sure you accountant is “writing them off” but you will receive no tax credit. With a PHSA you get a credit from the 1st dollar that you claim!
2. Once you hit the deductible – you only get a 15% federal credit and a 10% provincial credit (Alberta) – so a total of 25%. A PHSA allows you to deduct 100% of the cost of your medical and dental expenses.
Take an example of a family who has child going in for orthodontia work – assume they are incorporated, report an earned income of $60k, and the ortho bill is $3000 per year.
Under the Medical tax credit, the family would have to pay $1800 (3% of 60k) before getting a credit – then they would get a 25% credit on the remaining $1200 = $300 tax credit – at the 36% tax bracket (26% fed. 10% prov.) this means a total tax savings of $108 – WOOOHOOO! (sarcasm)
With a PHSA, you would deduct the full $3300 from you business and based on a 36% tax bracket – this would translate to a $1188 tax savings! No sarcasm here – that’s a great deal!
Next part will show how this plan can work as an employee benefits plan.
Happy Easter!
Rhett
