A Private Health Services Plan (PHSP) is a Canadian tax relief measure introduced to allow small businesses to provide health coverage to employees, business owners, and their families on a cost-plus basis. With a PHSP, all costs are fully tax-deductible for the business and the health benefits are tax-free to all members of the plan. There are significant tax savings to both the business and the members. Even a small, one-person business can deduct health expenses without an elaborate and expensive health insurance plan.
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How it Works
The Covered Employee (or any member of their household) obtains a medical service which they pay directly to a health service provider, such as a dentist, doctor, optometrist or pharmacist (see here a good list of eligible expenses). The payment can be by cash, debit, cheque or credit card. Let’s use $100 for an example. A receipt is obtained from the health service provider. At this point the employee is out-of pocket $100.
The Covered Employee submits a health benefit claim with the original receipt to the PHSP planholder (the business).
The PHSP planholder forwards the original receipts by postal mail along with a business cheque for $100 plus the plan’s administrative fee and applicable taxes.
The PHSP Administrator adjudicates the claim, earns their fee and sends a tax-free reimbursement cheque ($100) to the Covered Employee. The employee is fully reimbursed and is no longer out-of-pocket anything. From the Covered Employee’s viewpoint, it is just like commercial health benefit insurance except there is no deductible so they get all of their money back, they have a much broader choice of eligible services, and they get their money back quickly.
The business remains out-of-pocket. In return, the business receives from the PHSP Administrator an annual tax receipt for the full amount of all of their costs during the business’ fiscal year. These costs are recorded by the business as a fully tax-deductible employee benefits expense.
The net effect of these transactions is the business has now borne the cost of providing health care benefits to its Covered Employees.
Many arm’s-length employees do not want their employer or a fellow employee to know what health services and medications they are claiming. If the business decides to honour the privacy and confidentiality of its employees, some PHSP Administrators will allow claims and receipts to be sent directly to them by the employees, in which case, the PHSP Administrator notifies the planholder and requests funding for the claims.
For small business owners with no employees, setting up a PHSP makes all of your family health benefits tax-free.
For businesses with employees, the fixed fees combined with caps established by the business makes this much more economical than premium-based health benefit insurance plans.
At the business owner’s option, Covered Employees in a PHSP can include, in addition to the employee:
- the employee’s spouse
- any member of the employee’s household with whom the employee is connected by blood relationship, marriage or adoption.
The Difference between Health Insurance and a PHSP
A PHSP is a method of covering health expenses as a business expense up to a predetermined dollar amount. The business owner sets the dollar amount for each employee and this amount will only change when the business owner resets them on the plan’s anniversary date. This allows the business to forecast and budget future health expenses with certainty.
Health insurance, on the other hand, distributes the risk of events over all plan holders, so monthly premiums must be charged to all plan holders whether a claim is made or not. Insurance plans also vary significantly in the level of coverage you receive. The more risk that is covered by the insurance plan, the higher is the cost. In addition to claims costs, insurance companies also charge for assuming plan “risk”, administration fees, sales fees and profits. These are built into all insurance premiums that you pay. It is the insurance company that determines your health benefits cost each year. The only way you can reduce costs is to reduce your employee coverage.
A PHSP generally only charges an administration fee when a claim is made. The coverage is very comprehensive and allows a much wider selection of eligible services. Furthermore, you pay for only what you use when you use it, so there are no monthly premiums.
It is also possible to use a PHSP in combination with an insured plan. However, many businesses and individuals simply choose to rely on provincial health plans to provide coverage for catastrophic events and use their PHSP for routine coverage.
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