How A Private Health Services Plan Can Save You Money
How A Private Health Services Plan Can Save You Money
You might have heard of a PHSP or Private Heath Services Plan (also called a Cost Plus plan or a Health and Welfare Trust), but how does it actually work? Can it really save you money? It sounds like a gimmick when you first hear the concept: pay for your medical expenses yourself and then pay an extra 10% premium to have the expense run through your company. Are you just paying and extra 10% over the cost of your medical expense for nothing? How does this tax savings actually put more money in your pocket?
This article will try and unpack the concept of a Private Health Services Plan (PHSP) from a tax savings perspective. There are two main things to consider here: a taxable expense and a tax deductible expense. Since controlling taxation in Alberta and Canada is a corner stone of income and wealth management, you have to understand how this can be implemented to add up to significant ongoing savings.
You must be incorporated!
In order for this to work you must own an incorporated company (it can be provincially or federally incorporated - it doesn't matter). All employees of the corporation can then benefit from the PHSP. In essence, the PHSP allows the employee to incur an eligible medical expense and then get reimbursed by the corporation as a tax free benefit. The expense is then transferred to the corporation and can be claimed as a tax deduction from corporate profits.
This can result in significant savings, since your personal tax rate could be much higher than the corporate tax rate. Let's look at an example of an incorporated consultant who has only two employees in the company (the consultant and his/her spouse). The marginal tax rate of the consultant is at the maximum of 39% (in Alberta). He incurs a dental expense of $1,000. Here is how the PHSP would save him money on this one expense:
The consultant pays the dentist $1,000
He/she then submits the $1,000 expense to his/her PHSP administrator
The PHSP plan carves the corporation $1,100 for the expense and the admin fee of 10%
The PHSP plan sends the consultant a cheque for $1,000 as a tax free benefit
The corporation can deduct the full $1,100 from it's corporate profits
At this point no taxes have been paid on the medical/dental expense incurred. This is far better than the consultant paying for e expense with his/her after tax income. Here is how much he/she just saved in taxes:
Gross income required to net $1,000 = $1,639 (at a 39% marginal tax rate)
Immediate tax savings = $1,639 - $1,000 = $639
Administration fee paid = $100
Net savings of using the PHSP is $539 ($639 - $100)
As you can see the 10% administration fee is very minor compared to the tax savings by setting up such a plan. Also the company can tax deduct the entire expense, the eligible medical expense and the administration fee.
You can also expense your health and dental plan premiums through your PHSP. If you are spending $200 per month for a family health and dental plan, this premium can be reimbursed to you as an eligible health care expense and all claims that are paid to from the insurance company providing the health and dental plan would be tax free income to you also. This creates a real win-win scenario.
As you can see, there is a lot of benefit to owning a Private Health Services Plan (PHSP). It can turn medical expenses from your own after tax income into a tax deductible expense for you and your family. It can even be used if you are an empires with a PHSP plan for the employee group. You can save thousands per year in taxation if you had a lot of medical and dental expenses. And there is almost no carrying cost to the plan. It only cost $100 per year to keep the plan active. Otherwise it is a pay as you go plan, only costing you a 10% admin fee for your health and dental expenses.
If you would like more information on how a PHSP could benefit you or your employees, please check out our page on PHSP plans with our strategic partner, Beneco.
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