Fully Deductible Medical Expenses

The Financialist • Issue 82 • April 2004
BY BRYSON MILLEY AND BRETT SIMPSON

It is no secret that our government cannot balance its budget and cover all the health care costs of an ageing population. Anyone who has had an eye exam, a physiotherapy or chiropractic visit, or a regular prescription drug requirement in the last year has felt the sting of paying more of these and many other health costs than they had in the past.  In all likelihood, this trend will continue, as costs are shifted out of our public health plans (MSP) directly to the individual or private insurers.

Many employees have some form of comprehensive health are coverage through their employer, their association, or as a dependent on their spouse’s plan. Even the best of these plans do not cover 100% of expenses, especially when it comes to the “bigger ticket” services such as restorative or orthodontic dentistry, eyeglasses and contacts, or lifestyle prescription drugs. Commonly, grouped benefit plans have some element of co-insurance and a deductible, payable by the employee, on covered services. Often, the costs for dental, extended health and vision care are paid by the employer while employees pay for their disability income and life insurance protection.

There is a tax reason for the sharing arrangement where health and welfare benefits are concerned. A corporate employer can pay health, dental, and vision care costs on behalf of its employees, and deduct those costs as it would the employee’s salary, but the benefit costs are not included in the employee’s income and are obtained tax-free. This is a substantial savings (30-44%) to the employee over paying themselves.

For the self-employed

What if you do not belong to a grouped benefits arrangement directly or indirectly? If you are self-employed – a proprietor, partner, small business owner, professional practitioner or consultant, or you are employed in an influential position in a business – then the Income Tax Act holds a surprise for you.

A Private Health Services Plan (PHSP) allows self-employed individuals and corporations to tax-effectively provide health, dental, and vision care benefits on behalf of their employee  beneficiaries. This often results in a 30-40% savings by having the business deduct the expenses from income, thereby lowering taxes.

If you own a business or have self-employed income, PHSPs are almost universally beneficial. The following table illustrates the resulting savings:

How it works

The corporate employer or self-employed individual makes tax-deductible deposits to the PHSP for the benefit of the employee/partner/proprietor and their dependents to spend tax-free on qualifying medical expenses. Unincorporated businesses can contribute $1500 per adult and $750 per child per year for employees and their dependents. Deposits remain to the credit of the employee until they are spent. Anyone in the family can utilize the entire balance as needed.

Some of the possible expenses that can be reimbursed by
a PHSP are:

• • Eye exams
• • Corrective eyewear
• • Crowns, caps, inlays, root canals
• • Prescription drugs
• • Hospital bills
• • Insulin treatments
• • Pre and post-natal treatments
• • Physiotherapy and massage
• • Chiropractic treatments
• • Dermatology and cosmetic surgery
• • Lab tests (PSA), X-rays
• • Fertility treatments
• • Oral surgery

The full list of eligible expenses is much longer and growing as new treatments and therapies become commonplace.  (Please refer to our website for a more comprehensive list.)  In general, reimbursement can cover expenses that would have qualified as a medical expense under subsection 118.2(2) of the Income Tax Act.

Given the limitations on tax-advantaged plans in general and on eligible medical expenses specifically, there are certain qualifying requirements to form a PHSP in your business.

The plan must contain the elements of insurance, and for this reason, an arm’s length relationship with a third party plan administrator is customary. The plan administrator drafts the PHSP documentation (for a fee of $200) and then adjudicates the eligibility of expenses (for a fee of 10%-15%) to maintain compliance and tax deductibility.

The legal, accounting and administrative costs of collecting deposits, paying claims and tracking entitlements is borne by the third party as part of the “risk”, and is recovered through fees. The business is “self insuring” the size of risk based on its chosen deposits to the plan.

Rogers Group Financial advisors have access to PHSPs from a number of administrators. Favourable features include:

a) $200 one-time set-up cost
b) 10% adjudication fee as a percent of claimed amounts
c) available STOP-LOSS third party insurance for in-province and Travel Medical Insurance
d) automatic direct deposit of business contributions from bank account
e) direct deposit claims reimbursement to employee bank accounts

STOP-LOSS is mandatory for unincorporated businesses to meet PHSP qualifications for insurance risk. It is optional for incorporated entities. This feature limits the self insured dollar level liability for uncontrollable health costs to a deductible ($1500 single - $4500 family) for a premium ($7-$16 per month). It provides $25,000 in-province extended health and $1,000,000 travel medical coverage on a range of covered health costs up to age 70.

A PHSP represents a private defined contribution “à la carte” health spending account. The business decides on the contribution to benefits; the employee and family decide on which health needs they want to spend it on. The only limits are the dollars in the account.

If you are self-employed or a business owner, ask your Rogers Group Financial advisor about tax-advantaged health spending.