Clients who are owner-managers should consider company health-care plans for themselves and their employees.

As an advisor, you can help clients consider the potential risks and costs before they decide whether to implement a group health-care plan, in which the risk is borne by an insurer, or a self-insured plan, in which the employer carries the risk.

Many owner-managers may not be comfortable with a self-[insured] plan, says Terry Zavitz, president of London, Ont.-based Terry Zavitz Insurance Inc. “You have to ask: ‘Is [the owner] OK with this?’”

The tax issues surrounding employee health-care plans can be complex, so care is needed
in setting them up. Advisors who are not familiar with health-care plans are urged to seek the help of a more expert insurance advisor. Here are some important factors to consider.

> Group plans. Typically, most group insurance plans provide partial coverage; they have restrictions on what health-care expenses are covered and limits on the value of coverage.
Individual plan members can benefit from unlimited claims for certain expenses, such as prescriptions, while other members may not spend as much as they are entitled to for expenses that have thresholds.

If premiums paid by a company in a particular year are insufficient to cover the actual costs incurred by the insurer of the plan, the owner-manager’s premiums may be increased the following year. In some cases, premiums can be higher than the cost of claims. Premiums paid by the company are tax-deductible for the business. Premiums paid for extended health care, vision care and dental care are not taxable benefits in the hands of the employee.

If your client’s business is incorporated, one key concern with a group plan is that Canada Revenue Agency is likely to view the benefits given to shareholders alone as a taxable shareholder benefit.

In January 2001, the CRA issued an opinion stating that health-care benefits given to a plan member who is also shareholder are taxable. However, the CRA will provide an exemption from tax liability when the benefit is comparable in nature and value to benefits generally offered to employees with similar responsibilities at companies of a similar size.

Under a group health plan, different classes of employees can receive different levels of benefits. For example, senior employees could be provided with higher annual limits or broader coverage than junior employees.

“Care should be taken that benefits are determined based on employment classifications, not whether the individual is a shareholder,” says Glenn Stephens, lawyer and planning services consultant with Toronto-based PPI Financial Group. To avoid tax problems, benefits should be commensurate for employees at the same level. If benefits are deemed to be for a shareholder, the deduction could be viewed unfavourably by the CRA and be treated as taxable income to the shareholder, says Ted Ballantyne, director of advanced tax policy at the Ottawa-based Conference for Advanced Life Underwriting.

An owner-manager with an unincorporated business with no employees faces other concerns with group plans. For example, his premium deduction is limited to a maximum annual premium of $1,500 for individuals 18 years of age or older and $750 for each dependent child.

> Self-funded plans. Another way a client can provide health-care benefits for employees is by setting up a self-funded plan.

One option here is a “health-care spending account.” With an HCSA, says Zavitz, the employer designates a set amount of money each year from which employees can claim eligible medical expenses under the Income Tax Act.

The other option is a “cost-plus” plan: the employer contracts with an insurance company to indemnify claims by employees for certain risks defined in the plan. The employer agrees to reimburse the cost of such claims plus an administration fee to the plan or insurance company. The employer can then deduct these costs as health-care expenses.

Unlike group plans that include administrative expenses in the premiums, a cost-plus plan is a service contract with charges specific to the services provided. Fixed start-up fee and transaction fees to process claims are also tax-deductible; benefits received by employees are tax-free. Any premiums paid by employees qualify as medical expenses.

HCSAs and cost-plus plans are tax-effective ways to obtain enhanced group coverage that would not normally be eligible under most group plans. The Income Tax Act defines the expenses eligible for coverage but does not place a specific dollar limit on the amount of coverage. IE