Health and Dental Plan or Health Spending Account? A Primer for Incorporated Business Owners
If you own an incorporated business, you are probably your own benefits department. No one hands you a plan. You decide whether to have one, how much to spend, and how much risk to carry yourself.
There are two common ways to approach health costs. This article explains both, and how they differ on budget, tax and risk. It does not tell you which is right, because there is no single right answer. The right choice depends on how you feel about risk, and on what your numbers allow.
The two tools
An individual health and dental plan is insurance. You pay a regular premium, and the plan pays part of your covered costs, such as prescriptions, dental care and paramedical services, within the limits and exclusions of the policy. You know your cost each month. The insurer takes on part of the risk of a large year.
A health spending account is not insurance, in the sense that you fund it yourself. The business sets aside money, and the account reimburses eligible medical costs as you claim them. You pay for what you use, up to what you choose to fund. You carry the risk of a large year yourself, because the account pays only what you have put in.
Both exist alongside your provincial health plan. Private plans are generally designed to supplement the provincial plan, and what a given policy pays varies, so read the policy wording.
Tax: the general idea
Tax is the reason some incorporated owners look at these tools. Depending on how a plan is set up, the tax treatment of health costs paid through a corporation may differ from costs paid personally. Whether any difference applies to you is a question for your accountant.
A few points to keep in mind:
The rules depend on structure. Whether a cost is deductible to the business, and whether it counts as a taxable benefit to you, depends on how the plan is set up and who is covered.
Eligible expenses follow tax guidance and plan documents. For a health spending account, eligible expenses are generally tied to what the Income Tax Act and Canada Revenue Agency guidance treat as medical expenses, and the plan documents set the final list. An insured plan pays what the policy says it covers. The two lists are not the same.
Owners are not all treated the same. The tax rules can differ for incorporated owners and sole proprietors, so confirm how they apply to you.
The numbers matter more than the label. Any tax advantage, if one applies to you, only helps if the spending would have happened anyway.
I am not an accountant, and your situation is your own. The reason to talk with your accountant first is that they can tell you what applies to your corporation.
Budget: how each one feels in a year
A plan gives you a fixed cost. The premium is the same whether you have a quiet year or a busy one. Premiums can change at renewal and as you age, so "fixed" means fixed for the term, not forever.
An account gives you a flexible cost. In a quiet year you may spend little. In a year with large dental work or a prescription that costs a lot, the account runs out when the money does.
Cash flow differs. A plan is a steady monthly payment. An account is funded when you choose, which some owners prefer when business income is uneven.
For some owners, steady budgeting matters most, and a plan may feel better. For others, spending only on what they use matters most, and an account may feel better.
Risk tolerance: no single right answer
This is the question underneath everything else.
Some owners need the comfort of having a plan in place. They sleep better knowing that a large claim will be shared with an insurer. They would rather pay a known cost each month than think about an unknown one.
Other owners are comfortable self-insuring. They would rather keep the money in the business and pay for care as it comes. They accept that a bad year will cost them more.
Neither approach is right for everyone. They are different answers to a question only you can answer: how would you feel if a large bill arrived in a year when cash was tight? Your answer helps you describe your comfort with risk. A licensed professional can then discuss how the options fit your situation.
Some owners use both. A plan may help with the large, uncertain costs, and an account may reimburse some of what the plan does not cover.
A different kind of risk: disability
Health and dental plans deal with costs. They do not replace income.
For some owners, loss of income is a significant risk. Your business may depend on you, and your household may depend on your income. Disability coverage is designed for that. It can pay a monthly amount if an illness or an injury keeps you from working, if you qualify and the claim meets the policy terms. Your occupation and health history affect whether you qualify.
Three features are worth understanding:
The waiting period: how long you wait before the first payment.
The benefit period: how long payments can last.
The definition of disability: how the policy decides you are unable to work, for example whether it looks at your own occupation or any occupation. Separately, some plans cover accidents only and others cover illness as well.
Price, exclusions and the underwriting questions matter too. Some owners consider disability coverage once they have settled health and dental, because it addresses a different risk. It is part of financial security alongside budget and tax.
Five questions to think about
How would you feel about a large health bill in a tight year?
Do you prefer a steady monthly cost or a flexible one?
What does your accountant say about your corporation?
Do you have coverage through a spouse or another source?
If you could not work for six months, what would happen to your business and your household?
Talk it through
Not sure how a plan, a spending account or both would fit your corporation? Send a message and I will walk through the questions with you, with no obligation.
Patrick Hardie is licensed to sell insurance in Alberta and British Columbia through Safe Crest Insurance Inc., an independent brokerage. Safe Crest is paid by insurers and other benefit providers through commissions, and compensation varies by product and provider. Safe Crest does not act for any single insurer and is not affiliated with any government body. This article is general education, not tax, legal or insurance advice. Confirm tax questions with your accountant. Whether a plan pays depends on whether you qualify and whether the claim meets the policy terms.
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