Geoff McIntyre
Let’s set the scene: imagine you just released your first vintage under your own label. You have a spouse who isn’t working and you are about to have your first child. Currently you have no staff, but your business is expanding rapidly and you are ready to hire your first employee. With so many new wineries out there, it’s a competitive market. As you start to write the job posting, you suddenly realize that any suitable candidate is going to want medical and dental coverage. You have been so busy dealing with the increase in customer demand that you haven’t had time to think about this for either yourself or your future employees. With your own family growing, health coverage now seems more important than it ever did before.
The Options
One option is to look at traditional group insurance plans through an organization such as Blue Cross or other insurance companies. However, such plans may require a substantial premium to provide the level of coverage desired. Unless you are an extremely large employer that allows employees to pick and choose, group insurance generally provides a set list of what is covered at a fixed cost. In such a situation there will always be employees who are not satisfied with either the coverage (i.e. not broad enough) or the cost (i.e. they are paying premiums for coverage they do not require).
A much better fit may be a Private Health Services Plan (“PHSP”). A PHSP can alleviate some of the issues encountered by a traditional group insurance plan. For example, a PSHP can allow employees to pick and choose the medical services they require while offering the business a certainty as to its costs. They are straightforward and easy to understand for both the employees and the employer.
What is a PHSP?
A PHSP is a type of health and welfare trust that is governed by the Income Tax Act of Canada (“ITA”) which allows the employer to reimburse the employee for medical and dental expenses incurred by them and their immediate family members. Normally, such a reimbursement would be considered a taxable benefit. However, one of the limited exceptions is an employer’s contributions to or under a PHSP.
In essence, a PHSP allows employees to have their medical expenses reimbursed on a tax-free basis while enabling the business – either a proprietorship or a corporation - to have a full deduction for the reimbursed expenses. Instead of paying employees a higher salary in lieu of providing medical and dental coverage, the employer agrees to reimburse the employee for eligible expenses up to a pre-set annual limit. The reimbursement is not taxable to the employee, but is still fully deductible for the employer. Even better, if an employee and his or her family have no, or limited expenses, the employer has less expense.
To qualify under government rules, the PHSP must be in the nature of insurance. This means it must be “an undertaking by one person, to indemnify another person for an agreed consideration from a loss or liability in respect of an event the happening of which is uncertain.” Further, the coverage under a PHSP must be for medical care that would normally qualify for the medical expense tax credit under the ITA.
How does it work?
Generally a PHSP is set up through a third party service provider. There are many out there, and set up costs have decreased substantially over the past few years. The employer will contract with the PHSP provider to cover certain medical costs as defined in the employees’ employment contract (e.g. up to $1,000 for a certain level of employee, up to $5,000 for another level, etc.) on a “cost-plus” arrangement.
When the employee, or their family member, incurs a medical expense, they pay for it out of their own pocket and submit the medical receipt to the employer. The employer issues a cheque to the PSHP provider for the amount of the expense, plus an administration fee of a certain percentage of the costs (10% is normal). The PSHP provider in turn will reimburse the employee for their actual costs and keep the administration fee. Alternatively, employees may submit their receipts directly to the plan administrator, which provides a layer of anonymity between the employer and employee who has incurred the expenses.
If you are not afraid of some paperwork, you can save the administration fees and establish your own plan as an employer. CRA states that such direct reimbursement plans may qualify as a PHSP. As noted in paragraph 7 of Interpretation Bulletin IT-339R: “This occurs where the employer is obligated under the employment contract to reimburse such expenses incurred by the employees or their dependants. The consideration given by the employee is considered to be the employee’s covenants as found in the collective agreement or in the contract of service.”
Employees as shareholders
It is common to have a situation where an employee is a shareholder of the company, and often the sole employee. In order to be covered under a PHSP, an owner/manager must receive the benefit in their capacity as employee, not as a shareholder. When there are multiple employees and equivalent coverage is provided to all employees (shareholder and non-shareholder alike), CRA will normally consider the coverage to be an employment benefit rather than a shareholder benefit. When you have a sole shareholder or all the employees are shareholders, coverage provided must be part of a reasonable employment remuneration package.
If it is determined that the coverage is received by the individual by virtue of being a shareholder, a different section of the ITA would apply and the individual would now be in receipt of a taxable benefit. Further, in this situation payments to the shareholder would not be deductible to the corporation. I would always recommend that an employee shareholder consult with their legal and accounting advisors prior to implementing a PHSP.
A PHSP may not be the perfect solution in every situation. But depending on the types of benefits you want to provide and the number of employees you have, a PSHP can be an extremely useful component of a business owner’s toolbox and may be worth considering.