A Health Spending Account is a cost-effective alternative or supplement to traditional health insurance. A Health Spending Account can turn your after-tax personal medical expenses into pre-tax deductible business expenses.
Health and dental expenses reimbursed through a Health Spending Account are 100% deductible by your corporation and are received 100% tax free by you, the owner, and your family.
How does A Health Spending Account work?
- You, the business owner, pay personally for medical expenses required for yourself or members of your family.
- You submit a claim to your HSA provider. Filing a claim typically includes:
- Submitting the receipt/invoice for the health-related expense, and
- A payment to your HSA provider equal to the amount you paid personally. These funds will be used to pay you a full reimbursement for the expense.
- Your corporation claims the payment as tax-deductible employee benefits expense.
- Upon approval of the claim, your HSA provider deposits the reimbursement in your personal bank account. You receive this money as a tax-free reimbursement from your HSA provider.
What types of expenses can be claimed?
An HSA can be used to pay deductibles, coinsurance, or amounts in excess of the maximums allowed for in a traditional benefits plan. HSAs can cover:
- Medications
- Eye glasses and contact lenses
- Professional services (like chiropractic or physiotherapy)
- Dental services that may not be part of an existing dental plan (like caps, crowns, bridges and orthodontics)
- Dental expenses above an existing plan maximums
- Psychological and emotional health services
- Hearing aids and similar equipment or services
- Any healthcare related equipment or devices
- Smoking cessation products (nicotine patches, gum, etc.)
Any expenses which would be eligible for the Medical Expense Tax Credit are eligible for reimbursement through your HSA. Click here for an extensive list of eligible medical expenses which can be reimbursed.
Case Study
Mark owns an incorporated small business that pays income tax at Manitoba's small business rate of 9% federally and 0% provincially.
Mark draws a salary from his business each year and has a marginal personal income tax rate of 40% (the percentage of tax that he pays on any additional income he would draw from the corporation).
Mark has $5,000 of medical expenses coming up this year and has two options available to him:
Option A: He can draw $8,333 from his corporation and pay 40% of the amount ($3,333) to the government as personal income taxes. He can then use the remaining $5,000 to pay for his personal medical expenses.
- Or -
Option B: He can use $5,000 of personal funds to pay for the medical expenses. He then submits the invoice for services as well as a payment from his corporation to his HSA provider.
His corporation claims a deduction of $5,000 as a tax-deductible business expense which reduces his corporation's taxes payable by $450.
He receives a tax-free reimbursement from his HSA provider and avoids paying an extra $3,333 in personal income taxes.
Using an HSA (Option B) saves Mark thousands of dollars in combined corporate and personal income taxes.
Is A Health Spending Account Right For you and your business?
Health Spending Accounts provide a great opportunity for small business owners who:
- are self-employed and incorporated
- want to pay for health and dental expenses in a tax advantageous way
- have health and dental expenses that aren't covered by their company's benefits plan
- own a business which is too small to justify the cost of a traditional benefits plan
Reach out to our team today to discuss how a Health Spending Account can benefit your business and your family by providing health coverage along with exceptional tax savings.
