Health Spending Accounts in Ontario: Big Benefits for Small Business Owners and their EmployeesBy: Ryan Davey, PhD
February 19, 2020
Editors: Ryan Davey, PhD and Lindsay Davey, MScPT, MSc, CDT
Health Spending Accounts in Ontario are easy to set up, cost-effective to run, and offer small business owners and their employees greater flexibility and cost savings than classic employee health and dental benefits plans.
If you work in the private sector in Ontario there is a 70% chance that you are either employed by, or own, a small business. Unfortunately, this also means that there is a good chance that you lack an employee health benefits plan. Once widely considered to be an employment perk exclusive to public service and big business, employee health benefits plans are increasingly being offered by small businesses as well. This is in part thanks to increased competition for skilled employees, and the availability of small business-friendly Health Spending Accounts (HSAs) – also known as Private Health Services Plans (PHSPs).
With a little explanation and a few calculations I’ll show you just how valuable a Health Spending Account could be for your small business, or for the small business that you work for.
Although my cost-savings calculations are specific to Ontario, the same general conclusions can be drawn for all other provinces excluding Quebec where Health Spending Accounts are taxed differently.
What is a Health Spending Account (HSA)?
A Health Spending Account allows businesses of any size to directly pay for their employees’ and owners’ personal health expenses by converting them into a regular business expense.
Employees and owners get 100% coverage of their families’ health and dental expenses, and the business writes off the full amount as a business expense. A win-win!
Unlike traditional employee health benefits plans which are a form of private health insurance, Health Spending Accounts are self-insured by the Employer. This means that there are no insurance premiums to pay, no insurance coverage restrictions or limitations, and no unnecessary expenses for unrelated insurance products that are often “lumped in” to group plans (such as life insurance). With Health Spending Accounts the employer simply decides how much their employees are allowed to spend each year on eligible health and dental expenses, and then pays a third-party administrator to manage the plan for them.
Here’s a few more details:
How do Health Spending Accounts work?
- Incorporated and non-incorporated businesses of all size can be eligible. This includes large corporations, corporations with a single owner/employee, and sole proprietorships with at least one arm’s length employee.
- The employer signs up with a Health Spending Account Provider such as EasyHSA to administer the benefits plan and assigns a maximum annual benefit to each employee class. For example, a larger business might establish an “Executives” class with a $10,000 maximum Health Spending Account, a “Managers” class with a $5,000 maximum, and a “Staff” class with a $1,500 maximum. At the other end of the spectrum, a very small business comprised of a single owner who is also the sole employee would have a single employee class and could assign a maximum annual benefit of up to $15,000. Many Health Spending Account Providers including EasyHSA do not require the employer to make any up-front cash deposits into the account, and instead only invoice the employer after employee health expense claims are made. This set up means that businesses are able to minimize their plan costs and maximize their cash-flow by only paying for actual expenses that have already been incurred by their employees, and up to their predetermined annual plan maximum.
- Employees get reimbursed 100% of their eligible health expenses (up to their annual maximum). Employees and owners (who are also active employees) can pay for a very wide variety of personal health and dental expenses out of pocket, submit their receipt to their Health Spending Account Provider, and receive a full refund (up to their maximum annual benefit). Unlike regular pay or bonus, this amount is tax-free to the employee. Unused amounts in the Health Spending Account do not accumulate by rolling over to the next year, nor do any unspent amounts belong to the employee. If they are not used they are forfeited, and the business pays nothing.
- The employer writes off the full amount as a regular business expense.
Health Spending Accounts in Ontario work much the same way as in the rest of Canada, albeit with a few meaningful differences that I will highlight below.
How do Health Spending Accounts benefit employees?
- Flexible and complete coverage for everyday health expenses. Employees can use their Health Spending Account benefits plan to pay for 100% of any CRA approved health or dental expense for themselves and their family. They could spend the whole amount on a single health service such as Registered Massage Therapy or they could spread it across a variety of health and dental services and supplies as they see fit. There are no service-specific limits, and there are no co-pay amounts or other fees. In contrast, classic group health insurance plans typically cover only 70-80% of eligible expenses, up to some maximum for each type of service or supply. Some also place upper limits on what they deem to be a “reasonable” per unit cost for a service or supply, and others charge a user fee to plan members for the first claim submitted each year. Since health insurance companies are paid irrespective of how many claims they process, plan restrictions such as these help them to reduce the total number and dollar value of claims submitted, and thereby reduce their expenses.
- An enormous variety of eligible health and dental expenses are covered. Generally speaking, any service provided by a Regulated Health Professional in the province that you receive the service will qualify. This includes not only Physicians and Surgeons, Dentists, Physiotherapists, Chiropractors, Pharmacists, Optometrists, and others that you might expect, it also includes Registered Massage Therapists, Traditional Chinese Medicine Practitioners, Registered Psychotherapists, and Homeopaths. You can search the full list of covered heath professionals here. Health Spending Accounts will also cover medications prescribed by a physician or pharmacist, as well as a wide variety of other health supplies prescribed by Regulated Health Professionals. Health Spending Accounts can even be used to pay for copay amounts or other fees charged by a spouse’s traditional employee group health insurance plan.
- It puts real money in employees’ pockets. Simple to understand, simple to use, and 100% coverage without restriction. It is easy for employees to appreciate that their Health Spending Account is a true employment perk that provides tax-free money for everyday health costs that they would otherwise be paying for out of pocket.
- It is more valuable than receiving the same amount paid as salary or bonus because it is tax-free in the hands of the employee. You can find out what an equivalent salary increases might look like in my second table below.
How do Health Spending Accounts benefit owners?
- Owners who are also bona fide employees can also use the plan for their personal health expenses. Even corporations with a single owner/employee qualify, or sole proprietors with a single arm’s length employee. This can result in significant tax savings to the owner. In the table below you can see just how much an owner could saving by using a Health Spending Account in Ontario compared with paying for their health expenses using their salary.
- Employers only pay for expenses actually incurred by their employees. Unlike classic employee group insurance plans, Health Spending Accounts can be exclusively fee-for-service, sometimes known as ‘cost-plus’ (such as with EasyHSA). In this case the employer only pays for expenses actually incurred by their employees and would pay nothing at all if an employee’s plan is not used in a year. Nor do Health Spending Accounts accumulate year-over-year, instead they renew at the same predetermined annual maximum benefit.
- 100% of expenses related to the HSA can be written off as a regular business expense. This means that any health expenses reimbursed to owners or employees through the Health Spending Account is entirely tax free. The business pays for the expense with before-tax dollars, and the owner or employee receives it as a tax-free payment.
- Transfer retained earnings out of your business tax-free. Thanks to the tax advantage offered by Health Spending Accounts, it is significantly cheaper to “pay” yourself with a Health Spending Account than with an equivalent salary, bonus or dividend bump.
- Encourage your employees to stay healthy. If your employees don’t have to pay anything to see their dentist or optometrist then they are more likely to go, as are they more likely to have their drug prescriptions filled.
- Attract, retain and reward employees cost-effectively. Health Spending Accounts in Ontario are a smarter way for small businesses to compete for skilled labour. Thanks to their inherent simplicity and flexibility it is easy for employees to appreciate the tangible real-world value of their Health Spending Accounts, and I would argue much more so than with traditional group insurance plans. It is also more cost effective for employers to offer a Health Spending Account than it is to reward employees with an equivalent bump in salary (since it is tax-free and incurs no payroll costs) – while at the same time encouraging employees to stay healthy! Better yet, with Health Spending Accounts the business only pays when actual expenses are incurred by their employees. As a further boost to their cost-effectiveness, Health Spending Accounts are a second-tier form of health insurance. This means that employees must use any other extended health insurance they have access to first (such as a spouse’s traditional plan) before submitting any remaining amounts to their Health Spending Account.
Financial benefits of Health Spending Accounts
How much could an OWNER save with a Health Spending Account in Ontario?
Health Spending Accounts can save business owners (who are also bona fide employees) a considerable amount of money on their families’ health expenses. How much depends on the particular tax situation of the owner, but the amounts can be striking.
In the table below I’ve outlined 9 different scenarios to give you a sense of how much you might save as an owner.
To make it fair, I’ve compared having a Health Spending Account to the alternative, which is simply paying out of pocket for expenses and claiming them on your personal income tax return using the Medical Expense Tax Credit (METC) program. The Medical Expense Tax Credit program allows individuals to use some of their personal health and dental expenses as a partial personal income tax deduction, the amount of the deduction depends on your taxable income.
For my calculations below I used 2020 Ontario personal income tax rates, and also took into consideration the fact that Health Spending Accounts in Ontario have RST and Premium tax applied to them. Unlike HST, RST and Premium tax are not Input Tax Credits (ITCs) and so they cannot be recovered directly by a business. These are instead written off as a regular business expense, and I’ve incorporated them as such. If you’re following along at home, I’ve also used marginal tax rates (which is the income tax rate you pay on your next dollar earned) rather than average tax rates.
- You and your business are located in Ontario.
- Your Health Spending Account is exclusively ‘cost-plus’ with a 5% administration fee and no other charges besides tax (as per EasyHSA).
- Your personal tax situation is very simple.
- The model doesn’t take into consideration the financial impact, good or bad (but likely good), that would result from also offering Health Spending Accounts to any employee(s) you may have.
Personal Health Expense Savings for the Business Owner:
|Owner’s Annual Salary (Gross)||$50,000||$50,000||$50,000|
|Savings with the METC||$0.80||$301.55||$903.05|
|Savings with an HSA (after tax)||$285.41||$570.81||$1,141.63|
|Advantage of HSA over METC (after tax)||$284.61||$269.26||$238.57|
|Total savings over METC (%)||19%||9%||4%|
|Owner’s Annual Salary (Gross)||$100,000||$100,000||$100,000|
|Savings with the METC||$0||$118.73||$720.23|
|Savings with an HSA (after tax)||$522.97||$1,045.95||$2,091.89|
|Advantage of HSA over METC (after tax)||$522.97||$927.22||$1,371.66|
|Total savings over METC (%)||35%||31%||23%|
|Owner’s Annual Salary (Gross)||$150,000||$150,000||$150,000|
|Savings with the METC||$0||$118.73||$720.23|
|Savings with an HSA (after tax)||$549.91||$1,099.81||$2,199.63|
|Advantage of HSA over METC (after tax)||$549.91||$981.08||$1,479.40|
|Total savings over METC (%)||37%||33%||25%|
As you can see, even after all expenses are factored in, Health Spending Accounts provide significant after-tax savings to business owners.
This is compared to the alternative approach of simply taking cash out of the business as a salary or bonus, paying for health expenses out of pocket, and using the CRA’s METC program to claim the expenses on their personal tax return. For example, an owner earning $100,000 per year with $1500 worth of family health expenses would save $522.97 by using an HSA!
If you’d like a more personalized estimate of your potential savings, you can use this table of 2020 income tax rates and this handy income tax calculator to calculate it for your specific circumstances.
How much is a Health Spending Account worth to an EMPLOYEE in Ontario?
If the company you work for offers you a $1,500 health spending account, and you use it to pay for health and dental expenses that you were going to pay for anyway, this is equivalent to being paid $1500 tax-free. In pre-tax money (gross income) this is the same as increasing your salary by $1500 divided by (1 – Your Marginal Tax Rate).
Technically speaking this isn’t perfectly accurate though, because by using a Health Spending Account in Ontario you forfeit the opportunity to take advantage of the CRA’s Medical Expense Tax Credit. Expenses that you submit to your Health Spending Account can’t also be included on your income tax return (you can’t “double-dip”). In the table below I take this into consideration to estimate the true value of a Health Spending Account to an employee in Ontario for four different scenarios.
Employee salary equivalence for a Health Spending Account in Ontario:
|Employee Base Salary||$50,000||$50,000||$100,000||$100,000|
As you can see, if for example you earn $100,000 per year, your employer’s $1,500 HSA is equivalent to a $2,650.64 salary bump or bonus!
How much could a BUSINESS improve its bottom line?
The answer to this question is obviously business and industry-specific, but in most cases Health Spending Accounts would be expected to improve the bottom line of a business by:
- Encouraging employee health and wellness.
- Increasing employee retainment.
- Increasing the ability to attract new employees.
- Rewarding employees with a tangible benefit that, thanks to the associated tax savings, is less expensive to offer than an equivalent salary boost or bonus.
Health Spending Accounts are a smart choice for small business
After reading the above you probably won’t be surprised to learn that we ourselves use a Health Spending Account benefit plan for Toronto Physiotherapy. Even though we are in the business of offering private health care services, there are many more health services that we don’t offer yet regularly access with our families, such as dental and eye care, and drug prescriptions.
We have an impressive publicly funded health care system in Canada, but there remains a lengthy list of health services and supplies that are either not covered by OHIP, or severely underfunded (such as the OHIP Physiotherapy shortfall). Unfortunately, this includes many health services that are necessary for recovery from illness and injury. Employee health benefit plans of all shapes and sizes can help fill this gap.
Thankfully, with the availability of Health Spending Accounts even the smallest of employers can now craft a cost-effective employee benefit plan to protect the health of their employees; attract, retain and reward employees in a competitive labour market; and save owners and their businesses money.
Thanks Ryan for this wonderfully researched and helpful article. I’ve been struggling to find viable options going forward. Very well explained.
Thanks Laura! We’ve been using an HSA for a few years now, so I’ve been familiar with them for a while :)