It’s that time of the year again: the fourth quarter. Many small business owners spend Q4 sprinting towards their annual revenue target and gearing up for a successful new year. But did you know that small business owners who also work in the business can enjoy tax advantages by opening and using a healthcare spending account before the end of the year? If no, keep reading!
What is a healthcare spending account (HSA)?
A healthcare spending account is a way for employers to give themselves and their employees benefit dollars to use for out-of-pocket medical expenses. At BeniPlus, we offer small business owners – who work in the business – a virtual Benefit Wallet that includes a healthcare spending account. To learn about what medical expenses can be claimed through a healthcare account, read our HSA eligible expenses list.
Reason #1: Save money this year by paying for eligible medical expenses with pre-tax dollars
If you have medical expenses on the horizon, there are tax advantages to signing up for the BeniPlus Benefit Wallet now and putting them through your HSA before the end of the year. You’re eligible to claim your expenses from the day you sign up for the Benefit Wallet, provided you complete the registration within 30 days. If you haven’t already done so, you can sign-up for a Benefit Wallet instantly here.
Example: $1,000 medical expense with and without a healthcare spending account
With the Benefit Wallet, if you pay for medical expenses through the HSA your company provides, you pay with pre-tax dollars, plus a 10% benefits administration fee. Outside of an HSA, you pay more with after-tax dollars. Let’s look at how that works.
Without a healthcare spending account: If you spend $1,000 on psychotherapy in Q4, the business must pay you a salary of $1,428.57 to cover that expense after taxes (assuming a tax rate of 30%). That’s $400 in taxes.
With a healthcare spending account: As the small business owner who works in the business, you pay your psychotherapist that same $1,000 from your personal chequing account. Then you submit your claim through your HSA and the company reimburses you. The company pays $1,000 for the expense and a $100 administration fee, totaling $1,100.
This means you pay $328.57 less for the same claim. And the news gets even better: because it’s a medical expense, that $1,000 you give yourself through the HSA account in your Benefit Wallet is also a non-taxable income!
But if you don’t open your HSA in Q4 and use it for your year-end medical expenses, you’ll lose the opportunity to pay for your eligible expenses with pre-tax dollars this year. What are you waiting for?
Reason #2: Reduce your tax bracket
Adding onto our example above, if you or one of your dependents has a costly medical issue, you may anticipate high medical expenses between now and the end of the year. With an HSA, you can pay for these expenses through the company which isn’t considered taxable income. If the expenses are big enough, you may find yourself in a lower tax bracket because you’re not paying yourself more salary to cover the medical expenses with after-tax dollars.
Reason #3: Forecast your benefit needs more accurately for next year
Rounding up the claims you could make with a healthcare spending account or wellness spending account in one quarter gives you a better idea of how many benefit dollars you’ll need over the whole year. This forecast is important because you choose the dollar amount to allocate to the Benefit Wallet (for yourself and your employees) once per year. You can’t adjust this amount willy-nilly throughout the year.
For example, if you allocate $1,000 to your HSA but end up with $5,000 worth of dentist bills, you’ll pay the $4,000 difference with your after-tax dollars, outside your Benefit Wallet.
We advise small business owners who work in the business to set up their own Benefit Wallet with more benefit dollars than they expect to use each year. That way, you reduce the risk of paying for your healthcare expenses out of pocket.
The last quarter of the year is a perfect time for taking care of important business and that includes turning your eligible healthcare expenses into a tax advantage!
If you’d like to benefit from the tax savings that come with healthcare spending account this ear, take 10 minutes today to get a quote for our simple, flexible and affordable employee benefits program.
Disclaimer: “Nothing in this post is meant to be taken as tax advice. Companies should check with their accountants or tax advisers to understand how the Benefit Wallet would affect their company and individual tax situation.”