Oct 03, 2016
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“To qualify, the plan must be made available to all employees of the group plan.”
Family business owners and their employees are frequently looking for ways to improve the tax-efficiency of funding personal health care costs. A group plan goes a long way to address basic costs, including dental, prescription drugs and other medical expenses that are eligible for the medical expense tax credit (“qualifying medical expenses”). However, the group plan cannot cover all potential costs without becoming too costly or unmanageable.
One solution is for the employer to add on a group “health care spending account.”
Here’s how it works.
At the beginning of each calendar year, every employee is awarded a pre-determined “spend amount” (say $2,000) that can be used on any qualifying medical expense. When the employee incurs a qualifying medical expense (which is either not covered in the group plan or falls outside the reimbursement percentage), the item is submitted to the plan trustee for reimbursement. The plan insurer (usually the same company as the normal health plan insurer) then fully reimburses the employee and bills the employer for the amount, plus a fee (usually 10%). The amount paid by the employer is fully deductible for tax purposes. The benefit is not taxable to the employee as it is received pursuant to the terms of the group plan.
The employee is not entitled to claim a medical expense tax credit for the expense.
What has been achieved?
Chances are the $2,000 incurred by the employee would not have been useful as a tax credit, since the employee’s medical threshold (3% of net income) would have resulted in little or no medical expense credit.
The employer can deduct the $2,200 ($2,000 plus 10% admin fee) it pays as a premium. The employer need only generate taxable income of somewhere in the range of $2,400 to $2,600 pretax income to pay the $2,200 (if the income is subject to the small business deduction) depending on the province.
Without the plan, the employee would have to earn approximately $3,700 to net the $2,000 needed to pay the qualifying medical expenses. Using the plan allows the employee to receive coverage for the qualifying medical expenses with no cost and saves the employer between $900 and $1,300.
To qualify, the plan must be made available to all employees of the group plan, subject to differing limits for different classes of employees. Effectively implemented, a health care spending account can dramatically subsidize the cost of funding employees’ medical expenses.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.