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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