More and more Canadians are taking matters into their own hands and giving entrepreneurship a try. These self-employed individuals are oftentimes sole proprietors and run unincorporated businesses. This affords them greater freedom and some tax benefits, but the career choice is not without its shortcomings. Dealing with health care, for instance, can seem like quite the daunting and overwhelming task.
A Health and Welfare Trust (HWT) plan that allows these small business owners manage health and dental expenses in the most cost-efficient and tax-effective manner possible. After all, it can be very difficult negotiating a supplemental health and dental plan when you are the only employee.
The HWT is suitable for both unincorporated and incorporated businesses, since it works quite differently from traditional group or individual health insurance programs. There are no ongoing premiums to be paid.
Instead, the company owner pays a one-time setup fee. After that, there is a 10% administration fee associated with each claim submitted. Why would you want to pay this 10% admin fee? As it turns out, your net cost can be quite a bit lower by using the HWT rather than paying for medical and dental expenses out of pocket.
If you pay for your own health and dental expenses out of pocket, this comes from your after-tax dollars. With the HWT, the expenses come from pre-tax earnings and they can be written off by the company. It is also a tax free benefit for the employee (you). The best way to understand this is to go through an example.
Let’s say that you go to your dentist for a regular checkup and cleaning. The bill comes to $100 and your current income tax bracket has you paying 25% for your sole proprietorship earnings.
To pay for this bill, you would effectively be using this formula:
Gross Income (amount earned by company) x (1 – tax rate) = Net Income (the amount of money you need to pay this bill)
GI x (1 – 0.25) = 100
GI x (0.75) = 100
GI = 133.33
Because you have to pay income tax before you have money that can be spent on personal expenditures (as would be the case with “out of pocket” medical expenses), your business needs to earn $133.33 to pay the $100 bill. Now, contrast this with your effective cost using the HWT program. With the 10% admin fee, the $100 expense becomes a $110 one. Going through a similar formula, we find the following:
Net Cost = Expense Cost x (1 – tax rate)
NC = 110 x (1 – 0.25)
NC = 110 x (0.75)
NC = 82.50
Since it comes from pre-tax earnings and it is a business expense that can be written off in full, the net cost for this $100 dentist visit is really only $82.50. Compared to the “out of pocket” example, this represents a savings of $50.83.
The savings are even more pronounced at a higher tax bracket. Going through the same formulas at a 50% tax rate, the resulting figures are $200 and $55, respectively, resulting in a savings of $145.
In addition to the direct monetary savings that can be realized with a HWT, the plan also offers several other advantages to small business and self-employed individuals.
This demographic typically has little “purchasing power” with conventional insurance companies, so getting a good health and dental plan at a reasonable price can be challenging. Even if you are able to get a plan, HWT can serve as supplemental coverage to pay for deductibles and similar costs in a tax-effective manner.
It should be noted that unincorporated businesses must also enroll in the supplemental insurance. This is to satisfy the “element of insurance” requirement from the Canada Revenue Agency (CRA). You must also satisfy one of two income requirements as an unincorporated business: your self-employment income is more than 50% of your total income or your income from other sources is $10,000 or less.
The annual cost of the supplemental benefits, which includes a travel component and an in-province catastrophic component, is $91.44 for individuals, $174.84 for couples, and $223.40 for families. These all carry a $1500 deductible per person.
A HWT offers comprehensive coverage for medical, health, and dental treatments. This includes but is not limited to dentists, chiropractors, masseurs, optometrists, psychologists, speech therapists, blood tests, guide dogs, laser eye surgery, alcoholism treatments, braces, root canals, artificial limbs, pacemakers, and wheelchairs. For sole proprietors and unincorporated businesses, benefits are limited to $1500 for the sole proprietor, $1500 for the dependent spouse, $750 per dependent child, and $1500 per dependent child aged 18 to 25 who is a full-time student.
For more information email Gary Jones at [email protected] or call 778-552-8638.