Private Health Services Plans for Incorporated Physicians A Brief Overview

Incorporated physicians should be well-versed in the regulations surrounding Private Health Services Plans (PHSP), especially when it comes to Health Spending Accounts (HSA). The Income Tax Act offers several tax benefits for PHSPs. For instance, an employer can deduct its contributions to a PHSP, provided they are reasonable and made to generate income. Moreover, employees don’t have to report the employer’s contributions or any benefits they receive from the plan as income. Understanding Health Spending Accounts (HSAs)
HSAs, typically managed by third parties like BrockHealth or Benecaid, operate on a “cost plus” basis. In this arrangement, the administrator charges a fee for each claim, which usually ranges between 5% and 15% of the claimed amount. The administrator then reimburses the physician or their family members for actual medical and dental expenses. The medical professional corporation pays the administrator the reimbursed amount plus the administrative fee.

For example, if a plan member incurs a $4,000 orthodontic expense not covered by their existing medical or dental plan, the process would be:
- The plan member pays the dentist $4,000.
- The medical professional corporation pays the insurer $4,000 plus an administrative fee.
- The plan member receives a reimbursement of $4,000 from the plan administrator.
CRA’s Perspective on PHSPs

The Canada Revenue Agency (CRA) has always maintained that for a plan to qualify as a PHSP, it must essentially be an insurance plan. This means there should be a significant risk element assumed by the employer. A recent CRA interpretation from May 3, 2022, sheds light on whether an HSA established by a corporation with a single shareholder for that shareholder (and their family) would be considered a PHSP and, therefore, a deductible expense.

If the plan guarantees that the employee will be reimbursed the full amount allocated to them annually, it doesn’t qualify as an insurance plan and, by extension, not a PHSP. Similarly, if the employer can terminate the plan anytime without notice, it raises questions about the risk involved and its qualification as an insurance plan.

In cases where a corporation offers a self-insured HSA for its only employee, who is also its sole shareholder, and their family, it’s probable that the employee and their family would get reimbursed the full amount allocated annually. Moreover, the corporation, under the sole employee-shareholder’s control, can likely modify or end the HSA plan anytime without notice. In such scenarios, the CRA believes that the sole employee-shareholder is essentially paying for personal medical expenses through their corporation without any risk. Hence, such an HSA wouldn’t qualify as a PHSP.