For many business owners, health and dental benefits feel like something reserved for large corporations with big HR departments. But the reality is that small and medium-sized businesses — including nonprofits — have flexible, affordable options that can create meaningful tax savings while helping owners and employees manage healthcare costs.

The good news? Getting started is easier and more affordable than most of our clients expect.

A common misconception is that business owners think they need an expensive, traditional group benefits package to claim health and dental expenses through their company.

The truth is flexible health spending accounts can allow business owners to reimburse eligible medical expenses through the corporation in a tax-efficient way. The process is easy and the cost is minimal.

Many owners don’t ask about these options and miss out on valuable tax planning opportunities.

The right benefits structure depends on the size of your business, your goals, and whether you have employees.

So, what is a Health Spending Accounts (HSA)?

For incorporated business owners and smaller teams, Health Spending Accounts are often one of the most practical and tax-efficient options.

These plans allow businesses to reimburse:

• Dental expenses
• Prescription drugs
• Vision care
• Physiotherapy
• Massage therapy
• Extended healthcare expenses

The flexibility makes these plans attractive for small businesses. You are generally reimbursing expenses rather than paying fixed premiums every month.

For many owners, this is the simplest way to turn personal medical expenses into corporate deductions.

How Health Benefits Help Reduce Corporate Tax

One of the major advantages of employer-paid health benefits is that they are typically tax deductible to the corporation.

This means:

• The corporation reduces taxable income
• Owners and employees receive eligible benefits tax efficiently
• Medical expenses may become more affordable overall

In most cases, employer-paid health and dental benefits are deductible business expenses. One exception commonly noted in traditional group plans is life insurance premiums, which may not receive the same tax treatment.

This is why proper setup matters.

How does it work?

It’s pretty easy, and low administrative effort on the part of the owner and bookkeeper, here is an example:

• If you spend $500 on eligible health expenses, your business can reimburse that amount directly to the owner (they must be an employee) or an employee
• Many plans simply add a small administration fee (often around 3%-5%) typically paid for by the corporation
• The corporation deducts the expense
• The owner or employee receives the benefit tax free
• This is a full write-off for the corporation

Here is an example:

• A corporation earns an extra $10,000 before tax.
• The owner is in a combined personal marginal tax rate of 45%.
• The corporate small business tax rate is 11% (approximate; varies by province).
• The owner has $5,000 of eligible medical expenses (dental, prescriptions, glasses, therapy, etc.).
  
  

Option 1: Pay Medical Expenses Personally

To have $5,000 after tax to pay the expense:

1. The corporation earns approximately $8,264.
2. The Corporation pays 11% corporate tax = $909.
3. The remaining dividend available = $7,355.
4. The owner pays personal tax on dividend (assume effective 32%) = $2,354.
5. Net cash available = $5,001.

Total cost to generate $5,000 for medical expenses: approximately $8,264 of corporate profit.

Option 2: Corporation Pays Through an HSA

1. The corporation earns $5,000.
2. The corporation deducts the HSA reimbursement as a business expense.
3. No corporate tax on that amount.
4. No personal tax to the owner.
5. The owner receives $5,000 tax-free reimbursement.

Total cost to corporation: $5,000.

Tax Savings

	Personal Payment	HSA
Medical Expense	$5,000	$5,000
Corporate Profit Required	$8,264	$5,000
Additional Cost	$3,264	$0

Tax savings = approximately $3,264 (39.5%)

A Common Mistake Business Owners Make

A mistake we often see is business owners paying employees additional money for healthcare costs instead of using a formal benefits structure.

The problem? Direct payments or bonuses are generally taxable to the employee.

That means:

• Employees may pay personal tax on the amount
• The business loses some tax efficiency
• The intended healthcare support becomes less valuable

To properly access the tax advantages, benefits typically need to be administered through a recognized benefits provider or structured plan.

Benefits for Nonprofits and Executive Directors

Executive Directors and nonprofit leaders face many of the same challenges as private business owners:

• Rising healthcare costs
• Limited compensation budgets
• Employee retention concerns
• Pressure to maximize every dollar

Flexible benefits plans can help nonprofits offer meaningful support to staff without immediately committing to expensive traditional group plans.

As organizations grow, many chambers of commerce and industry associations also offer access to group benefit programs that can be cost-effective for smaller organizations.

When Should a Business Consider Group Benefits?

For small businesses, starting with a Health Spending Account may make the most sense.

As your company grows — particularly once you have around five or more employees — it may be worth exploring:

• Traditional group health plans
• Dental coverage
• Disability insurance
• Employee wellness programs

The key is avoiding overbuilding too early. Many businesses spend too much on benefits before understanding what employees value. However, attracting talent, and remaining competitive, in the market is a key consideration to evaluating when it’s the right time to explore a group plan.

Starting simple is often the best approach.

How Much Should a Small Business Spend on Employee Health Benefits?

There is no universal answer. A common guideline is approximately 3% to 8% of employee salary, but this varies significantly depending on:

• Industry
• Seasonal staffing
• Employee demographics
• Profitability
• Recruitment goals

A professional services firm may approach benefits differently than a seasonal operation or nonprofit organization.

The Most Important Step: Just Get Started

Many business owners delay looking into health benefits because they assume the process is complicated or expensive.

In reality, some of the most effective options are simple to implement and scalable as your business grows.

Health and dental benefits are not just for large corporations. Small businesses and nonprofits have flexible options that can:

• Reduce corporate tax
• Help manage personal medical expenses
• Improve employee retention
• Create more tax-efficient compensation structures

Health and dental benefits are not just for large corporations.