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Employee Benefit Plans. Prevention Is Worth A Pound Of Cure.

Health care is expensive. Between professional services, diagnostic tests, dental care, hospital costs, prescriptions and treatments, and medical devices, there is certainly potential for financial disaster for the unprepared.

For individuals without insurance, the Canadian tax system allows eligible medical expenses beyond an income based minimum to be claimed as a tax credit, on the theory tax relief should mean the same for everyone. Individuals could also subscribe to a private insurance plan, such as those offered by Blue Cross. Premiums paid to such plans are eligible medical expense.

For business owners, other options exist.

Blue Cross, and a host of other providers have plans specifically tailored to small to medium sized businesses. And several years ago, in response to rising premiums and the difficulties of small business in obtaining benefit plans for themselves and their small workforces, tax legislation was changed to allow the premiums paid by self-employed, unincorporated business persons to be deducted against business income.

This was a major change. Unlike the tax credit system, which takes 17% of medical expenses and treats it as a credit against taxes payable, this change allowed a direct deduction against business income, meaning unincorporated businesses whose owners are in the highest tax brackets benefit most.

Some restrictions apply. In order for the premiums to be deductible, you must be actively engaged (as a sole proprietor or partner) in a business, and self-employment must be either your primary source of income in the current year, or your income from other sources must not exceed $10,000. In addition, equivalent coverage must be extended to all permanent full-time arm’s-length employees. If you have no other full-time employees, the deduction is restricted to an annual maximum of $1,500 for each of you, your spouse and other family members 18 years of age or over and $750 for other members of your household.

For incorporated business, the larger the workforce, the more options become palatable because of economies of scale, and many insurance companies have plans and packages available. In addition, many associations use the power of their membership numbers to entice one of the large insurance companies to offer special rates and solutions. This area does become more complex because of income tax rules related to taxable benefits, so ensure you know the tax ramifications to your company, yourself personally, and your employees before signing any agreement.

One other interesting option is a Health and Welfare Trust, which for tax purposes, is one set up to as a private, group sickness, accident insurance, health services, or group term life insurance plan, or any plan that provides any combination of these benefits.

Essentially a trust is created and administered by someone arms length to the company, and the beneficiaries are the company’s employees. Its main advantage is that it can be used on an entirely discretionary basis by the employees, ie only for dental work, medicines etc., and its costs can be pre-determined and capped by the employer. Payments made to the trust are entirely tax deductible, it is easy to understand, unlike terms of certain insurance company plans, and simple to administer. Employees simply submit receipts they choose to the trustee and get re-imbursed. Note though there are specific rules related to payouts so be sure to use a competent, experienced advisor and a reputable trustee. This is especially important because there is no formal registration procedure for a health and welfare trust and no requirement that the trust agreement be submitted to CRA for approval prior to the implementation of the plan.

Another key advantage is costs. When provided by insurance companies, actuaries determine the likelihood and amount of possible claims. This of course forms part of the premium. But then to it are added administration fees and profit requirements so that (and this is the number I have heard) out of one dollar spent on premiums, 67 cents is paid out in claims. The rest covers insurance company administration costs, overheads, and desired profits. A Health and Welfare trust on the other hand, carries a set up fee, which should be no more than $1500, and an on going administration fee typically in the neighbourhood of 10%…. And the cost is entirely controlled by the employer, not subject to market experiences.

In summary, relying on publicly funded health care, and using private plans like Blue Cross, insurance company employee benefit plans, and health and welfare trusts, are all viable options and they’re all available from various suppliers. It is inevitable therefore that competition creates differences in prices and options, so make sure you ask the right questions.

These include:

Exactly what does the plan cover, and what does it provide that publicly funded health-care doesn't? What are the limitations to coverage and what does it not cover? What invalidates the plan? Is there a deductible? If so, how much? Why and how will premiums go up? What are my administrative responsibilities and duties of care? What is the claims process?

The key is to be well informed, and use reputable, experienced advisors and providers. In health care, as well as benefit plans, prevention is worth a pound of cure.

© 2015 John B Voorpostel

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