Overview

Today, as a small business, you have two options for obtaining Health coverage (Medical, Dental, Vision etc), for yourself, your employees and their spouses and dependents. You can either:

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Buy a small business insurance coverage package from an insurance company, or perhaps rely on coverage from a spouse's employer benefit plan or;
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Go without insurance, and simply pay for what you need, when you need it.

There are problems with both of these approaches, however.

If you decide to buy insurance

When you buy a package, you certainly get coverage for some of the items you want, and under certain circumstances the premiums may be tax deductible. That's the good news: However; 

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Insurance premiums for this kind of coverage are not cheap (often more than $200 per month), and of course, being insurance, you pay the premium every month regardless of whether you have any claims
bullet The Insurance Company naturally wants to limit its exposure, so there are some built in constraints.
bulletThere is typically a deductible, per person, which the individual pays first
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There are both yearly and lifetime maximums, either in dollars or number of claims, beyond which the plan won't pay.
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The plan only covers a fixed percent of any given claim, ranging typically from 80% of basic health care services to 50% of more unusual services (i.e. expensive). Some items are not covered at all.
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The list of exclusions, constraints, limits and rules within these plans is very confusing, but the underlying message is that you get only the coverage the plan offers. You don't really have any flexibility.

This means that anything that is not covered...you have to make up the difference!

If you chose not to buy insurance

The advantage of this approach is that it is very simple. You pay for only what you need, when you need it.

The huge disadvantage is that there is effectively no tax relief.

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If your company pays the expense, then it has to be shown as a taxable benefit for the employee, and is added to the employee's taxable income.   Therefore no tax saving 

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If the employee pays the expense, it is paid for in after tax dollars. The only potential tax relief for the employee is by using the medical expense deduction on the individual T1 Tax return. Unfortunately, the formula that is used almost always results in a zero, or negligible deduction. For example, for an annual medical expense of $2000.00, for an employee earning $60,000 per year, the tax credit is only $65.00

The better approach!... a Cost Plus plan from HealthPlus 

The Federal Government has defined a special type of health care arrangement, called a Private Health Services Plan. Essentially, this is the same kind of plan that has been available to large companies, but can now be used by the self employed and small business.

In its Interpretation Bulletin IT-339R2, paragraph 6, the Federal Government has further defined the meaning of a Private Health Services Plan to include what is called a "Cost Plus" plan.

In essence, under a Cost Plus plan the employer contracts with a Trustee (HealthPlus) to provide indemnification of valid employee medical claims. How it works is simple.

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The employer registers with the Trustee (HealthPlus Corporation) to set up the plan
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Under the terms of the plan, the employer remits to the Trustee a cheque for the amount of the claim, plus a processing fee.
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The Trustee will then directly reimburse the employee for the claim amount
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By doing this, the employer has now established a Private Health Services Plan

Advantages

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The biggest advantage is the fact that under this type of plan medical expenses are now considered a business expense of your company, but are not considered as taxable employee benefits and are not added to the employee's income. As can be seen in the example below, the savings can be considerable.
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There are no regular premiums. A Cost Plus plan is not insurance. Only actual expenses are incurred and claimed. 
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Extended Coverage Within the broad definition of what the Income Tax Act defines as a medical expense, your company can establish whatever coverage is desired. This could include items that an Insurance plan doesn't cover, or establishing a plan with no deductibles and 100% coverage. It is entirely at the discretion of the Employer.
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Top up The plan can even be used to get a deduction on expenses you had to pay for items that were not covered by any insurance plan you already have (For example, coverage by a spouse through an existing employer plan)  

Financial Benefits

The processing fee from the Trustee is 10% of claims submitted, plus GST on the processing fee. In addition, the Employer is required to pay Ontario Premium Tax (2%) on all benefits paid. (This is remitted by the Employer on line 588 of the Ontario Tax return CT23) 

Here is an example of the overall savings with a Cost Plus program. These examples assume an employee salary of $60,000, a combined Federal/Provincial tax rate of 45%, and an annual medical claim of $2,000. The first example assumes the employer has paid the expense. 

Employer
Employee
Net cost to Employer/Employee
No Insurance
$2,000 deduction from income
$2,000 added to income
$2,000

HealthPlus plan


$2,258 deduction from income
($2,000 medical expense + $200 processing fee
+ $58 GST  & Premium tax)

 


Nothing added to income


$1,242
($2,
258 expense - $1,016 tax reduction)
Savings of $758!!