When it comes to covering healthcare costs, insurance programs for small companies are often inflexible and too expensive. Fortunately, there is a way for you have your business provide healthcare benefits without setting up a formal insurance plan, even if you have an unincorporated company.

Personal health Spending Plans (PHSPs) can save you a substantial amount of money, by letting you expense healthcare costs through your business using a third party service. Here is an in-depth look at the ins and outs of PHSPs.

What is a PHSP?

Personal Health Spending Plans are plans that allow a business to pay for 100 per cent of qualifying health care expenses of its employees, including company owners.

To qualify as a PHSP the plan must be set-up with a third party provider following the guidelines of Canada Revenue Agency's (CRA) Income Tax Act. In addition to the cost of the healthcare expenses the business will pay administrative fees as well.

Perry Diebert, president of Custom Care, noted that PHSPs are available everywhere in Canada except Quebec; Quebec tax laws prohibit such plans.

The key advantage is that the company covers the healthcare costs, which can result in a significant tax savings compared to using after-tax dollars. PHSPs can also help smaller companies attract talented employees by providing a robust benefits plan without the complexity of signing up for a formalized group plan.

Another key benefit of PHSPs is that they will often allow you to claim a broader range of services than you would normally have access to with a traditional health benefits plan.

Two primary plan types

The labels used to describe healthcare plans can cause a lot of confusion.Essentially, all plans are personal health spending plans. Under the PHSP umbrella there are two sub-types of plans: pay-as-you-go plans and health spending accounts.

1. Pay-as-you-go. With the pay-as-you-go model, the business pays for your healthcare expenses after they are incurred. When you are ready to submit a claim you simply send in your receipts and a cheque to cover the applicable costs.
2. Health spending accounts (HSA). Under the health spending account model, the business banks money on an account with their third party provider. As money is sent funds accumulate. You can then draw against those funds using valid healthcare expenses.

The main difference between pay-as-you-go plans and health savings accounts lies in the way the money is sent to the third party provider. The basic costs will be similar with both plan types.

Breaking down a simple claim

Each PHSP company will charge a percentage fee on the receipts submitted, with fees typically ranging from 5 to 15 per cent. Some will charge an additional one-time set-up fee as well, while others will charge an extra administration fee for each claim that is submitted.

Variables that will change from plan to plan include:

• Initial account activation fees. Quite often companies that charge an initial activation fee do not charge fixed administration fees on individual claims.
• Percentage fees. All companies will charge you a percentage fee for the service of managing your money and withdrawing funds. Fees typically range from 5 to 12 per cent, with 10 per cent being the most common.
• Fixed claim administration fees. A fixed administration fee charged on individual claims. These are often levied when the company does not have an initial activation fee.

For example, here is how the claim would work for a $1500 dental bill with a plan that had a 10 per cent fee and no fixed administration fees:

Eligible expenses

While HSAs do offer a broader range of coverage than most traditional health plans, your expenses must meet CRA's list of qualifying services. It is better to find out before you pay for these services, if getting reimbursed is important to you.

Common qualifying expenses include prescriptions, medicines, dental care and vision care (eye glasses are eligible).

Services to watch include rehabilitative therapies like massages, chiropractic care, osteopathy and Chinese medicine.

When it comes to claiming an expense, not all healthcare providers are equal.

For example, a massage from a registered massage therapist should qualify as long as the practitioner is currently registered with the governing body in their province, while a massage from someone who is not a registered massage therapist will not.

If it is important for you to be reimbursed for an expense, your best option is to check with your plan provider before going ahead with the service.

Incorporated vs. unincorporated businesses

Both incorporated and unincorporated companies can take advantage of a PHSP, although there are some important differences on the rules for incorporated companies.

• With a corporation the money you deposit should be carried forward indefinitely, while sole proprietors may be required to use the funds within a set time period (typically 2 years).
• There are also limits on how much a business owner can claim in an unincorporated business.

If you are a sole proprietorship, it is important to investigate all your obligations before going ahead with a plan.

Choosing the best plan

There are several companies in Canada that offer health savings accounts. Each has its own costs, rules and procedures.

Keith Peden is the president of Brock Health Inc., a company that specializes in PHSPs for small companies with less than 3 employees. At 5% their fees are some of the most reasonable charged in the industry.

However, Peden notes that for larger companies it is often more appropriate to pay more for the benefit of more robust claim and privacy procedures.

Internally managing claim processing can get expensive when the number of employees gets beyond 2 to 3 employees, so selecting a plan provider that offers more elaborate administrative reporting can result in a direct cost savings.

What's more, privacy becomes an important consideration when non-owners employees are involved.

A plan that requires employees to first submit healthcare receipts to the employer could be seen as a breach of privacy. More sophisticated plans, usually HSAs, enable employees to file their claims directly with the insurer, keeping sensitive healthcare receipts between the employee and third party provider.

Questions to ask when choosing a provider

1. Do you have a one-time set-up fee? If so, what is the charge and does this fee cover all employees that I set-up under my plan?
2. What percentage fee do you charge on claims?
3. Do you charge a fixed fee, on top of the percentage fee, for each claim that is submitted by myself or an employee?
4. Do you offer pay-as-you go plans or health savings accounts?
5. Can my employees submit their claims to you directly? If so, what management tools can you provide my company to help me manage the money that is banked for each employee?
6. Where can I see a list of eligible expenses? (In particular, ask about common healthcare expenses that you expect to claim, such as acupuncture, massage therapy, osteopathy, homeopathy, Chinese natural medicine, athletic therapy, physiotherapy, etceteras.)
7. If I set-up a plan with your company, how far back can I claim expenses that I have not yet claimed with another company or on my personal tax return? (Under the legislation there is the possibility that you may be able to go back as far as 365 days prior to the first day of your current fiscal year.)