Cost plus in an arrangement to provide a facility for payment of legitimate expenses not covered by the insured benefit program. Cost Plus claims are those expenses over the present policy limits which a client wishes to have covered. In order to be eligible, they may qualify as an eligible medical and dental expense under the income tax act.
A Cost Plus arrangement can be set up with an insurer on a fee per claim basis. Insurers often includes the Premium Tax). The fee is usually subject to a minimum of $25 per claim and a maximum ranging from $150 to $500 (depending on the insurer). Provincial Sales Tax is also required on the claim and administrative fee.
As an example, assume a plan member had a $4,000 orthodontic claim and the dental plan did not provide orthodontic coverage. If the plan sponsor decided it wished to reimburse the plan member through Cost Plus, the transaction would be as follows:
Plan member pays claim of:
Plan Sponsor pays insurer:
$4,000 for claim
$250 Administrative Fee1
$340 Provincial Sales Tax2
Reimbursement to plan member from insurer:
1Assuming a fee of 10% (including premium tax and GST) of the claim to a maximum of $250, the fee is the lesser of $400 (10% of $4,000) and $250
2Assuming a 8% PST on the total of the claim and administrative fee (8% x ($4,000 + $250))
At first glance, one might look at the above calculation and ask why wouldn’t the plan sponsor pay the plan member $4,000 direct to avoid $590 in fees and taxes. The reason, of course, is that a payment directly to the plan member would be treated as income and therefore fully taxable. By using cost plus, the reimbursement to the plan member becomes non-taxable in the same manner as eligible expenses covered by the benefit plan.