The case for cost plus
BY Conor Quinn, vice-president group benefits insurance, The Co-operators | February 7, 2013
Cost plus is a tax effective and flexible way to supplement health, dental and vision care coverage that may be limited or not available under an insured group benefit plan.
It’s also an option for providing enhanced benefits to key plan members, such as executives, or benefits to members who would not otherwise have coverage, such as ill plan members requiring products or services not covered by an insured plan.
For a small administration fee plus the cost of the expense itself (and applicable sales tax), an insurer will process the claim under a cost plus plan. With cost plus, the plan administrator submits approved claims to the insurer on a cost plus claim form and includes a cheque for the claim amount, the administration fee and applicable sales tax. The insurer will send a reimbursement cheque for the claim to the plan member.
The plan sponsor may be eligible for a tax deduction based on the amount of the expense and the administration fee. The benefits the plan member receives through a cost plus plan are non-taxable.
What and who is eligible?
Coverage under a cost plus plan is provided for any expense that qualifies as a medical expense under Subsection 118.2(2) of the Income Tax Act (Canada).
The plan sponsor defines the class or classes of plan members (such as managers or executives) that are eligible for the cost plus plan, but must offer coverage to all plan members in that class.
Why consider Cost Plus?
There are a number of benefits to using cost plus claims reimbursement.
- Cost plus allows for the payment of expenses:
- not covered by a group insurance contract, or those in excess of plan maximums
- for employees not eligible under a group insurance contract, such as employees over the termination age or those declined for coverage due to poor health
- for a broader range of dependents, as defined by Canada Revenue Agency
- Plan sponsors may be able to claim the payments as a business expense, and should contact their accountant or tax advisor for details.
- Expenses paid by a cost plus plan are not charged to the insured plan, and are not included in renewal rate calculations.
While there are a number of benefits, there are also important issues to consider before implementing a cost plus plan:
- The plan sponsor must have health and dental coverage in order to submit cost plus claims for reimbursement.
- The claims must be incurred while the group is active.
- Your client is responsible for determining if the group is eligible to participate in a cost plus plan. Canada Revenue Agency (CRA) has indicated that a personal cost plus plan for the sole proprietor (and dependents) of non-incorporated businesses may not qualify as a Private Health Services Plan. Any contribution or premium and administration charges the owner/proprietor pays the insurance company to reimburse eligible expenses may not be considered an eligible tax deduction according to CRA.
- The plan sponsor is responsible for determining the eligibility of expenses and dependents as defined by CRA. The list of eligible medical expenses and the definition of dependent can be found on the CRA website (forms and publications, form IT-519) or by calling 1-800-959-2221.
Cost plus can be a valuable option for plan sponsors wanting to provide coverage outside the terms of their insured health and dental plan.