Health Spending Accounts – HSA – What they are and how they save you money.

Health Spending Accounts – HSA – What they are and how they save you money.

 

We all have medical costs, but for a small business what options do you have to make them business expenses instead of personal expenses and what is the tax benefit?  There are 2 options available to companies to move expenses from personal to business.  Traditional insurance and Health spending accounts.

As a small or large business you can get a health spending account or HSA and cover your own and/ or your employees medical expenses.  The benefits of HSAs are:

  • More services are covered depending on your plan than can be claimed for the personal medical tax deduction.
  • Expense to the company is controlled, it is actual plus a usually small fee.
    • You choose who gets covered and can limit how much each can spend.
    • Everyone pays for everything and is reimbursed which is all handled by the HSA company.
  • Owners can cover 100% of their costs and make them into a business instead of personal expense.
  • Business tax rate is lower than the personal tax rate and the expense is pre-tax
  • Easy for every business to get and gives you the ability as even the smallest company to have benefits
  • Has no shareholder loan implications, though if partners are involved discussions should happen about how much each partner can spend and limits set.
  • Especially beneficial if the owner needs expensive but pre-planned expenses like braces, glasses… and the company has the money to pay for the expenses.

There are also benefits of insurance you should consider:

  • Can cover items like life, short and long term disability.
  • Transfers the risk of large unexpected costs.
  • Insurance costs can be split between employer and employee.
  • Employees understand insurance better and prefer to have items like prescriptions covered upfront and not reimbursed later.

Tax implications (in a very simplified example):

  • If you, as a business owner, need to spend $1000 on medication
  • With a Health spending account –  HSA
    • $1000 becomes a company expense + HSA fees (in this example we will say $80) = $1080 expense to the company.
    • $0 expense to the owner.
    • In Alberta the corporate tax rate is 13% so this expense lowered the business taxes by $140.40
    • HSAs are a non-taxable benefit and therefore have no personal tax effect.
  • With Health insurance
    • The company/ owner (through payroll) pay premiums before the expense
    • Insurance premiums can be between $100 and $250+ a month depending on plan
    • The owner covers the deductible and employees portion as applicable.
    • The owner gets a medical expense tax credit if available and the company gets a business expense that lowers the corporate taxes.
  • Without an HSA or insurance
    • $1000 medication cost is 100% owner.
    •  Total eligible medical expenses must first be reduced by 3% of your net income or $2,237, whichever is less. The tax credit is 15% of the amount remaining.
    • Therefore if this is the first $1000 of medical expenses you get no tax benefit and if you can claim these expenses then you get a $150 personal tax credit.

 

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