Private Health Services Plans for Medical Professionals

An Overview: Tax-Free Benefits for Employees through PHSPs

1. Employers typically provide benefits to their employees, which are considered taxable income. However, there are certain exceptions under the Canadian Income Tax Act. One such exemption is the benefits provided through a Private Health Services Plan (PHSP) or Health Spending Account (HSA). Businesses can deduct the payments they make towards PHSPs for their employees and their dependents. These payments are not considered taxable income for the employees. Moreover, no CPP or EI premiums are levied on these payments. For a plan to be recognized as a PHSP by the Canada Revenue Agency (CRA), it should cover medical expenses such as prescriptions, dental care, vision care, and hospital expenses. The premiums paid for these should constitute 90% or more of the total premiums. Understanding PHSPs PHSPs are more cost-effective than traditional group health plans. This is because, in a group health plan, the monthly premium is determined based on risk, irrespective of the actual medical expenses. In contrast, with a PHSP, employers only pay when an actual medical expense is incurred. Furthermore, PHSPs are tailored to the specific needs of the employer, offering greater flexibility. Usually, businesses set up a PHSP through a third-party service provider. The process involves the employer contracting with the PHSP provider to cover certain medical expenses as outlined in the employment contract. When an employee or their family member incurs a medical expense, they pay for it and then submit the receipt to their employer. The employer then pays the PHSP provider the expense amount plus an administrative fee (typically around 10%). The PHSP provider then reimburses the employee and retains the administrative fee. Interestingly, if the employer directly pays for the medical expenses without involving a third-party provider, it might still qualify as a PHSP payment according to the CRA. Both incorporated entities, like physician or medical professional corporations, and unincorporated businesses can have PHSPs. However, the requirements differ, with corporations generally receiving more favorable treatment. PHSPs for Shareholder-Employees 

   For shareholders of medical professional corporations to qualify for PHSPs, they must receive the benefits as employees and not shareholders. This means: 

   • The shareholder should be actively involved in the daily operations of the business. 
   • The benefits they receive should be comparable to what a non-shareholder employee would receive. 

    

   PHSPs for Sole Shareholder-Employees 

   According to a recent CRA interpretation, a plan for a sole shareholder-employee might not qualify as a PHSP. This is because it lacks the elements of insurance typically found in such plans. 

   Penalties for Non-Qualifying Payments 

   If a shareholder’s medical expenses payment doesn’t qualify as a PHSP payment, it becomes a taxable benefit for the shareholder. Additionally, the corporation cannot deduct this expense, leading to double taxation. 

   PHSPs for Unincorporated Businesses 

   Unincorporated businesses, such as self-employed individuals or partnerships, have specific conditions to meet for their payments to be recognized as PHSPs: 

   • The business should operate regularly and continuously. 
   • Over half of the individual’s annual income should come from the business. 
   • The individual’s income from sources other than the business should not exceed $10,000. 

   Direct payments from employer to employee won’t qualify as PHSPs for unincorporated businesses. They need to have an insurance or “cost-plus” plan through a third party.