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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.