In Canada, individuals are already covered for the majority of medical expenses through their provincial plan. However, expenses like dental, vision, prescription drugs, and paramedical service are not. For many, it can be a big decision in choosing how to get coverage, or even whether to get any at all?
Typically, salaried employees receive coverage through an employer-funded health and dental benefits plan. However, small business owners and self-employed people don’t receive that same luxury.
The default option for many small business owners is to visit a local insurance agent and see which health insurance plan is right for them.
This isn’t the best first step of action as you are narrowing your scope immediately to one service and one opinion. There are other options out there which can be more suitable for a small business.
Here’s 3 ways a small business owner can pay for medical expenses in Canada:
You pay a recurring premium in exchange for coverage. This frequently results in a feeling of “not enough coverage for what I’m paying,” especially since health insurance plans have many exclusions, especially in the categories of dental and vision.
The plan cost structure can be complex, expensive, and restrictive. This means limits and deductibles set into each type of medical expense. If your premiums collected in a given year are higher than predicted by the provider, expect an increase in premiums the following year. Insurance providers raise fees to recuperate costs and ensure a profit in the long run.
The actual pooling effect you see in many insurance plans like auto insurance and home insurance don’t kick in for health insurance until you reach claims at a specified amount. This rarely occurs, if never, for small business claims. Additionally, there are never enough employees for pooling to occur within the business.
Many small business owners don’t have health insurance because it’s too expensive and the coverage is poor. This means they have no plan and they pay for their medical expenses “out of pocket.” Don’t feel bad if you’re in this situation – it’s actually more cost effective than most health insurance plans.
A third option is a Health Spending Account (HSA). A HSA allows a small business owner to pay for medical expenses with before-tax dollars. A HSA turns 100% of your after-tax personal medical expenses into before-tax business deductions. It incorporates elements of both insurance and tax planning, which can create thousands in savings for a small business owner. Additionally, it can be used to deduct premiums paid under an existing or spousal health insurance plan.
It is important to realize that medical expenses are a personal or after-tax expense.
Small business owners receive income from their own corporation. Once the money goes from the corporation to the individual, a portion is lost to marginal income tax. Let’s assume you make $100,000 annually and are taxed at a 40% marginal tax rate. If you want to buy a $2,000 pair of prescription sunglasses, you actually have to withdraw $3,332 from your corporation in order to receive $2,000 after income tax.
As a result, your marginal income tax rate will have a significant effect on the total cost of your medical expenses.
With a Health Spending Account, you can use the full $2,000 that you withdraw from the corporation to pay for the prescription sunglasses. In other words, you can pay for a medical expense with before-tax dollars.
Both a Health Spending Account and health insurance cover medical expenses but in fundamentally different ways. There are no premiums in a Health Spending Account. It is a tax plan with elements of insurance. It eliminates taxes on personal medical expenses for small business owners. There is no premium to pay, which means that you never lose money if you don’t make claims in a given year. There are no restrictive policies or limits on certain expenses. If your medical expense is eligible under CRA, then it will be eligible for a HSA claim.
The purpose of insurance is to protect an individual from unknown, potentially catastrophic events. For example, while driving a car, you cannot predict a potentially fatal crash, and so you choose to insure your car. This element of risk is what instigates a need for insurance.
Health and dental expenses are often maintenance events. These planned events are non-catastrophic and expected, like going to your routine dental appointment. In the event of a catastrophic dental event, insurance providers will rarely provide full coverage. You are bound to pay more in premiums than you receive, and if that is not the case this year, expect premium increases the following year.
Most people understand that it’s important to insure a house or vehicle against damage, but relatively few consider insuring their ability to earn income and provide for their family. I’m talking about long-term disability as an example. Let’s say you fall off a ladder and break your legs, you could be out of work for months, maybe years. How will you replace your lost income? This can be financially catastrophic, which is why you want to be insured for events like critical illness, life and accidental death, and long term disability. Even employer-sponsored plans rarely have the necessary amounts to ensure employees are fully covered.
Olympia Benefits helps over 54,000 small business owners save thousands on their medical expenses every year. You can get the health and dental benefits you deserve.