Could ‘Cost Plus’ Work For You?

This reimbursement option can be exercised for both health or dental expenses which exceed the coverage limits outlined in the current group insurance contract, or are not covered in the plan at all. These expenses however must be covered under the Canadian Income Tax Act. Expenses that are not insurable by law, cannot be reimbursed under the Cost Plus option.

It is no surprise that for financial reasons, employers make a conscious effort not to cover every possible expense eligible under a traditional group benefits program. However, in certain situations and for certain key employees, there may be occasions where an employer might want these key employees to obtain ‘additional reimbursement’ in a tax advantaged way; without having to pay cash to these employees for those expenses.

In those circumstances, Cost Plus is an appropriate tax advantaged tool for providing these benefits. If properly structured and administered, plan contributions/payments will be deductible business expenses and benefits obtained from the insurance plan will not be treated as a taxable benefit in the hands of the employee. The single biggest advantage to this arrangement is that claims paid from this arrangement are not charged to the experience of the plan.

In its simplest form, Cost Plus is used to make an ineligible health and dental expense, a deductible business expense. By submitting a previously declined (uncovered) benefit expense to the Insurer on a special claim form, that ineligible expense is transformed into a tax deductible benefit premium for the plan sponsor.

Rather than force a key employee to use $2,000 of gross income to pay a $1,200 orthodontic claim (assuming a 40% tax bracket), the plan sponsor would instead write a cheque to the Insurer for the original claim of $1,200 plus administration expense of $120 (assuming a 10% fee) and applicable provincial taxes of $105.60, for a total payment to the Insurer of $1,425.60. The Insurer in turn would process the claim and would then send a cheque to the insured or to the service provider for the total claim of $1,200.

Newsletter image

Most group benefit plans include a tax advantaged arrangement for reimbursing services not typically eligible for reimbursement.

In this example, not only does the employee not have to use $2,000 of their gross income to pay the $1,200 orthodontic claim, but the plan sponsor (assuming a 25% corporate tax rate) has generated a $356.40 ($1,425.60 *25%) tax deduction for the now eligible business expense of $1,425.60. This deduction reduces the net cost of the $1,200 claim, down to $1,069.20.

Expenses considered eligible under the Income Tax Act (where permitted by law) include cosmetic surgery, dental or medical care, orthodontics, circumcisions, hip and knee replacement, deductibles and coinsurance, amounts that exceed the benefit maximums and expenses that are excluded from the group benefit plan.

As noted in the preceding example, there is an administration fee that is required for the processing of Cost Plus claims. This fee varies by Insurer and can range from 10% – 15% of the claim amount. Usually Insurer’s also utilize a minimum administration fee of $50 per claim. Fortunately, they also have a maximum administration fee as well, that can range from $250 to $500 per claim. Each Insurer is different, but most Insurer’s charge this fee per insured employee.

It should be noted that there are certain technical guidelines associated with Cost Plus plans that cannot be covered within the context of this generic outline, so one would be well advised to seek professional tax advice when using these arrangements.

A Cost Plus benefit payment is considered a non-taxable benefit for plan members because this plan qualifies as a Private Health Services Plan. As such, it is assumed that a formal agreement exist between the employer and the eligible list of named employees that obligates the employer under the employment contract to reimburse that employee and their dependents for reasonable health and dental expenses. Accordingly, there needs to be a formal structure to the Cost Plus arrangement and the terms and conditions should be made known to the qualifying employees.

These plans are not for the exclusive use of business owners or other beneficial shareholders as the Canada Revenue Agency (Revenue Canada) has stated in a technical interpretation letter #9904155, dated April 28, 1999 that such an arrangement between a proprietor and an administrator does not qualify as a Private Health Services Plan and is thus not tax deductible.

Please contact us if you would like to learn more about these arrangements.

 

 

 

Newsletter image

 
2018-04-17T15:56:13+00:00