facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
What is cost plus and how does it work? Thumbnail

What is cost plus and how does it work?

An executive of your company is playing catch with their kid one weekend and an errant ball hits them in the mouth, knocking out a tooth. What’s worse is that they’ve used up their dental benefits for the year after a few unforeseen root canals and a ton of orthodontics for the kids. 

But, as a business, you’ve committed to offering a complete benefits package to your executive team. So naturally, you want to cover the ~$4,000 it costs to get a new implant.

So, what do you do?

At first glance, it seems like the easiest thing to do is give the executive $4,000. But, when you give your employee money, it’s considered payroll and so is subjected to taxes.

That means if you want to cover the full cost of the procedure, you have to cover the taxes as well. That can get expensive.

That’s where cost plus comes in.

Taxation of benefits

Before we go any further, we’re going to cover what a benefit is, and which are taxed or un-taxed.

According to the Canada Revenue Agency (CRA), a benefit is “a good or service you give, or arrange for a third party to give, to your employee”. 

This can include:

  • Health insurance
  • A company car
  • Tickets to the big game

However, unlike wages, not all benefits are taxed. 

Taxable benefits

A simple rule of thumb is if a benefit is primarily used for personal activity outside of work it is taxable.

This includes benefits given directly to your employee, or to someone closely related to the employee (i.e. the employee's spouse, child or sibling).

Examples of taxable benefits include:

  • Use of property, such as a lakehouse owned by the company
  • Company vehicles
  • Transit passes
  • Cash gifts
  • RRSP contributions

So, that $4,000 gift to your employee to cover their dental expense falls under number four on that list, cash gifts. As a result, someone has to pay tax on it.

Non-taxable benefits

Non-taxable benefits include any remuneration that primarily benefits the business.

Examples include:

  • Cell phone bills
  • Short- and long-term disability
  • Professional dues
  • Mileage for work
  • Health insurance

So how do you get your $4,000 payment out of cash gifts and into health insurance? Through a cost plus plan.

How does cost plus work?

Cost plus plans convert cash gifts into health insurance by routing the payment (in this case a dental bill) through a health insurance company, typically the same one your company uses to offer health care benefits to your employees.

So in the case of your executive with dental needs, you would pay your health insurance provider the $4,000, plus a fee and any applicable provincial sales tax, and then the insurer pays for the procedure.

That way, the benefit is considered health insurance and is non-taxable.

How much does it cost?

The main expense of cost plus is the administrative fees you get charged by your insurance company. These can range from 5% to 15% per cent, depending on your insurer, and whether you already have health care insurance through the company. However, insurers sometimes put caps or minimums on the cost of each transaction. 

As an added bonus, procedures or services paid for through cost plus are not charged to your plan. Therefore, they are not included in renewal rate calculations

How do I set up a cost plus arrangement?

Cost plus is set up on a per-claim basis. That means when you need it, you will contact your insurer to put the payment through. 

However, if you think you may need to make use of a cost plus transaction, contact your insurance provider to make sure they offer the service and to see what their fees would be.

How do I pay?

Payment depends on your insurer, but generally, you’ll fill out a cost-plus form and then send receipts and a cheque that covers both the cost of the procedure plus the admin fees and taxes to the insurer.

What can I use cost plus for?

Cost plus can be used to cover:

  • Procedures not covered by your health insurance or those that go beyond the plan maximums.
  • Employees not eligible for health insurance, including those who your insurance provider has declined to cover due to poor health.
  • A broader range of dependents beyond your insurance plan.

Stipulations of a cost plus plan

There are a few stipulations around the use of cost plus. These include:

  • The benefits have to be part of a private health services plan
  • The expenses must be medical as defined in the Income Tax Act (check the list here).
  • It has to be part of the employee’s contract of employment.

Paying directly vs. cost plus

Let’s take a look at the original example we covered above to see how cost plus will work in this case, and whether it will save the business money.

Without cost plus

Oral surgery cost: $4,000

Employees marginal tax rate: 26%

Taxes on the benefit: $1,040

Total cost: $5,040

To cover the whole cost of the surgery, and the taxes the employee would have to pay on the benefit, this business would have to give their employee $5,040.

With cost plus

Oral surgery cost: $4,000

5% Admin fee: $200

Total cost: $4,200

By paying through the benefits provider with cost plus, the business saves $840 in taxes.