Over the last decade traditional group insurance premiums have increased an average of 10% per year. Provincial governments downloading once-covered expenses such as chiropractic, physiotherapy, and vision examinations, have had much to do with escalating costs. Drug costs for new medications and annually adjusted dental fee guidelines, have also made a large impact on increased premiums.
Large and mid-size organizations benefit from volume discounts by having many employees, but smaller businesses do not have this luxury. For many self-employed individuals or family-owned businesses, a traditional group plan is not an option, either due to cost or restrictive features. Traditional small group insurance policies often disqualify people with certain pre-existing medical conditions, thus not meeting the needs of all family members.
What Exactly are PHSPs?
Private Health Services Plans are defined as employer-funded accounts intended to provide medical and dental benefits for employees.
The deposits made to the account to fund employee’s health expenses are tax-deductible for the company, and for the most part they are not taxable to the employee. Special rules apply to the optional “Wellness Rider” component which can cover expenses such as gym memberships, yoga classes or the purchase of high-end exercise equipment. The big gain to employees is that the benefits of the Private Health Service Plan are not taxable to the individual.
However, “Wellness Rider” benefits, if chosen, are taxable to the employee.
Employers choose an annual flat dollar maximum which is allocated for each individual including themselves, if they are actively working in the business. From there, the employee can elect to have an endless range of medical or dental procedures covered. Canada Revenue Agency (CRA) has a complete list of eligible procedures, expenses, and services in two Interpretation Bulletins – IT 339R2 and IT 85R2
How Do They Work?
First, a third-party administrator must be appointed, and a formal account created. Normally there is a one-time fee of $250 and forms are completed by the insurance broker and employer. Next, the account is processed by the 3rd party administrator, who establishes the rules as per CRA guidelines.
Included in the account agreement is a list of covered employees (including owners and active shareholders of the business) along with the maximum benefit for eligible medical and dental expenses. Upon approval of the PHSP, the employee then uses the medical and dental services as needed, while paying the health practitioner or product personally.
Following that, the individual submits the receipt for services/product (which was paid for out of their own pocket) to the 3rd party administrator. The company is then advised that funding for the invoice is required, plus 8% of the eligible expense to the trustee. The 8% is an administration fee that pays for the processing of the claim, and to ensure that the terms of the agreement were not invalidated. Once the claim is approved, the 3rd party administrator electronically sends the paid claim amount directly to the individual, with the entire process taking 3-4 days. The entire claim including the 8% administration fee is tax-deductible to the company and is a non-taxable benefit for the employee.
What are the highlights and key features of a PHSP?
For the Employer
- Tax deductible program to reimburse full time employee’s dental & medical expenses
- Cost certainty, as company knows in advance the maximum expense per year
- Proven benefit program that retains key employees
- There are no restrictions as to the type of occupation or industry that qualifies
For the Employee
- In general, the benefits received are non-taxable creating a very favourable after-tax experience. Note: under the Wellness Rider, this must be added to each employee’s T4
- Employees can pick & choose the expenses they want covered, creating a more flexible arrangement than a traditional group insurance program
- Can be designed so that employees do not have to pay a deductible or co-insurance amount or monthly premium which exists with all traditional group packages.
- Online submission of claims, thus protecting employee’s privacy