A private health services plan (PHSP) can be a great vehicle for small business owners and incorporated professionals. What is a PHSP? Simply put it is like having your own extended health plan, allowing your company to pay for and deduct your own personal medical costs, and payments do not even count as taxable benefits for you (or your spouse and family) as an employee of your company.
What does this mean? Well, instead of claiming a personal tax credit of only 15% for amounts greater than 3% of your net income or $1500 you can write off 100% of your expenses inside your company with pre-tax dollars. This will generate a substantial savings for people who are currently making their medical payments with after-tax dollars and generating relatively small medical tax credits tied to their income.
Sounds good? Yes, but there are a few rules to follow. One is that the plans must be available to all employees on the same terms. You can’t cherry pick the best plan for you and leave your other employees out otherwise CRA will not accept it as a bona fide plan so this may not work if you have a large staff, unless you choose to create such a plan in lieu of, or supplemental to wage increases. Plans can be created even if you are the only employee of your company (such as many professionals).
What medical expenses are eligible for coverage? That depends on the terms you establish but they may include all eligible expenses under the Income Tax Act, such as dental, prescriptions, physiotherapy, chiropractic, acupuncture, eyeglasses etc… Spouses and dependants of employees may also be made eligible.
As an incorporated professional in Victoria you may establish a plan that covers just you and your family, if you are the sole employee.
How do I set one up? Two ways, pay a third party PHSP provider, usually an insurance company, who will set up and administer your plan on a cost plus basis. You pay your medical costs personally, then submit your claim to your administrator who reimburses you and then bills your company for the cost, usually adding 10% for their services.
The second method is the do-it-yourself approach. It is not required by the Income Tax Act that a third party administrator be employed. If you choose this method there are a number of steps to ensure your plan is in compliance, including passing the necessary Director’s resolution to establish the plan and creating an appropriate employment agreement between yourself and your company establishing your eligibility. Your chartered accountant in Victoria should be able to assist you.