Cost Plus Insurance Plan and How It Works

If you’re a small business owner and looking for an affordable way to pay for your medical expenses, one option worth looking into is a cost-plus plan. It enables you to deduct 100% of your family’s health spending and, in turn, reduce your tax burden and medical costs by providing comprehensive health and dental benefits.

If you have additional employees, a cost-plus plan can be a significant “work perk” and help you attract and retain top talent. Here is a rundown of what a cost-plus plan is and how it works.

What is a Cost Plus Plan in a Private Health Services Plan?

A Cost Plus insurance plan is the simplest and most popular way of implementing a Private Health Services Plan (PHSP), recognized by Canada Revenue Agency. Tens of thousands of businesses in Canada use PHSPs to provide various health and dental benefit benefits to their workers. PHSPs can be implemented by both incorporated and unincorporated businesses (e.g., partnerships, self-employed proprietors).

Cost Plus plans supplement traditional group insurance plans and pay for hospital, vision, medical, and dental expenses not included in these plans. Companies use these plans to provide comprehensive health care, dental, and vision coverage to all employees or a specific class of employees, such as executives.

Cost Plus plans reimburse only those declared medical expenses under the Canadian Income Tax Act. Employees initially pay for the medical expenses and then file a claim with the employer’s chosen insurance company. Most carriers (if not all) cover Cost Plus plans.

Benefits of a Cost Plus Plan

A Cost Plus Plan offers numerous benefits to business owners and their employees. One of the primary advantages is that it provides a tax-effective way to supplement health care, dental, and vision coverage. By reimbursing eligible medical and dental expenses, a Cost Plus Plan can help reduce the net cost to the employer after taxes.

Additionally, it provides enhanced health benefits to key plan members, such as managers and executives. With a Cost Plus Plan, employees can enjoy 100% coverage for their health and dental expenses, without the need for deductibles or co-insurance amounts. This can lead to increased employee satisfaction and retention.

How Does a Cost Plus Plan Work?

Here’s how a typical cost-plus plan works:

• The employee personally pays for the medical expenses.
• Dental related expenses are also covered under the plan.
• She submits the original receipt of payment to the insurer contracted by the employer to receive reimbursement.
• The insurance carrier adjudicates the claim, and if everything is in order, the employer pays the claim amount plus the administrator fees and GST to the insurer.
• The insurer reimburses the employee for the claim amount. All benefits received through a Cost Plus plan are 100% tax-free. The employer may be able to write off all or part of the claim amount as a business expense.

For example, Kris Kubin, a senior executive with Biotech Inc., undergoes an orthodontic treatment. His group insurance plan through work includes only basic dental coverage and doesn’t cover orthodontics. Kris undergoes the recommended treatment, pays $500 for it out of pocket, and then files a claim with the insurer. His company, Biotech Inc., pays $507.5 ($500 + 10% admin fee + $5% GST) to the insurance carrier, who then writes Kris a cheque for $500.

What Eligible Medical Expenses Does a Cost Plus Plan Cover?

A Cost Plus plan can cover all expenses that qualify as medical expenses under the Income Tax Act of Canada. The exact list of covered expenses may vary from one Cost Plus plan to another. As an employee, if you have access to a Cost Plus plan, do read the plan document or speak with HR to ensure you understand what is covered. A Cost Plus Plan can complement a health spending account for additional flexibility.

Cost Plus plans typically cover the following:

• Professional Services: Acupuncturist, Dentist, Gynaecologist, Neurologist, Neuropath, Obstetrician, Ophthalmologist, Orthopaedist, Physician, Psychiatrist, Registered Psychologists, Surgeon, Registered Nurse, etc.
• Dental Services include dental Repair, Dental Replacement, Denture Repair, Denture Replacement, Oral Surgery, Tooth Extraction, Gum Treatment, and more.
• Hospital Services: Hospital bills, Anaesthetist, Vaccines, Oxygen Masks, X-Ray Technician, etc.
• Prescribed Medical Treatments: Organ Transplant, Blood Transfusion, Hydrotherapy, Insulin Treatments, Radium Therapy, Nursing, Psychotherapy, X-Ray Treatments, etc.
• Laboratory Tests: Blood Tests, Metabolism Test, Spinal Fluid Tests, Urine Analyses, etc.
• Medicines: Prescription Drugs, Oxygen, Insulin, etc.
• Prescribed Materials & Apparatus: Walking Assistance Devices, Hearing Aids, Assisted Devices for Breathing, Electronic Speech Synthesizers, Eye Glasses, Contact Lenses, Pacemakers or Heart Monitors, Oxygen Tent, etc.
• Other Expenditures: Prescription Birth Control, Ambulances Charges, Rehabilitative Therapy, etc.

Health spending accounts provide employees with more control over their health-related expenses.

What Expenses Are Not Covered By Cost Plus Plans? 

The following expenses are typically not covered by Cost Plus plans: 

• Birth control devices
• Over-the-counter products (supplements, aspirin, bandages, vitamins, etc.)
• Gym memberships
• Herbal supplements and homeopathic medications

Why Consider a Cost Plus Plan?

A cost-plus plan offers many advantages to small business owners, entrepreneurs, and self-employed professionals.

• Self-employed professionals and entrepreneurs can write off 100% of their family health and dental expenses
• Small business owners who offer a Cost Plus plan as a part of the employee benefits package are better able to attract and retain talent
• The employer picks the insurer, decides the maximum amount that can be claimed through the plan, and determines who can access the plan (In other words, the employer is in full control)
• Employers can determine the employee's annual benefit allotment, providing flexibility in managing benefits
• The plan has no eligibility limitations (no pre-existing medical conditions or age limitations)
• It also has none of the limitations of group health plans, such as co-insurance limits or deductibles
• Any Cost Plus plan premiums paid by a business are regarded as business expenses and are fully deductible
• The benefits are 100% tax-free to the plan’s recipient
• The plan reimburses medical expenses not included by group health insurance, thereby ensuring employees can access quality healthcare without worrying about the cost

What are the Canada Revenue Agency Criteria for Implementing a Cost Plus Plan?

• Enter into a PHSP agreement with an insurance carrier or a third-party administrator.
• Your company must fund the plan fully
• The Cost Plus plan set up by your company can only be used to cover qualified medical expenses; it can’t be used for purchasing additional insurance, like life insurance, critical illness insurance, and long-term disability insurance
• Cost Plus covers all health-related expenses eligible under the Canada Revenue Agency Income Tax Act.

How Do You Pay for a Cost Plus Plan?

You can either pre-fund a plan or pay as you go. Here’s a brief description of how each of these pricing models works. 

Pay-as-you-go

You pay for an allowable medical expense out of pocket and file a claim with the insurance carrier. The insurer will carefully examine and assess the claim to decide eligibility and calculate the reimbursement amount. Once the adjudication process is complete, your employer will receive an invoice for the amount to be reimbursed, plus GST and administrative fees. After you employer pays the invoice, the insurance carrier will reimburse you the amount you had spent. 

Pre-funded plan 

Your employer decides how much money they want to put into your Cost Plus plan. The insurer then sends the company an invoice for this amount. Once the employer processes the invoice, the allocated funds appear in your plan. You can use them to receive reimbursements for eligible expenses. When your plan runs out of money, the insurer asks your employer to replenish it immediately. 

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How Do Business Owners Save Money with a Cost Plus Plan?

As an owner of a corporation or a registered business, you essentially have two choices for covering medical expenses for yourself or your employees:

• You pay for medical expenses incurred by you with tax dollars
• You put a Cost Plus plan in place, allowing your company to pay 100% of eligible medical expenses, offering comprehensive health and dental benefits

Assuming your marginal tax rate is 43% and your medical expenses for this year is $5,000, having a Cost Plus plan can result in savings of $2,150.

Conclusion

A Cost Plus plan is the simplest way to implement a Private Health Services Plan (PHSP). It allows small business owners and self-employed professionals to save money on their and their dependents’ health expenses. When offered as a part of the employee benefits package, it can help you demonstrate your company’s commitment to the well-being of your employees and attract and retain talent. 

Want help finding the right insurance plan for your company? Book a call with a Dundas Life licensed advisor today.

Frequently Asked Questions (FAQs)

Can I use a Cost Plus Plan for expenses not covered by my regular health insurance?

Yes, as a corporation or registered business owner, you can use a Cost Plus plan to pay for medical expenses not covered by your private health services plan. 

Can I claim cosmetic surgery expenses through a cost-plus plan?

A Cost Plus plan covers expenses that qualify as a medical expense under the Canadian Income Tax Act. Because cosmetic surgery doesn’t qualify as a medical expense, Cost Plus does not cover it. 

Is there an annual limit to how much I can deduct from a Cost Plus plan?

Yes, there is. Several factors determine the limit. For example, a reasonable maximum annual limit for an incorporated business owner is $15,000. If your business has additional employees, you can decide specific amounts for each employee class (such as managers, full-time employees, etc.).

As a business owner, you are also responsible for deciding the eligibility of expenses and dependents as defined by the Canada Revenue Agency. 

Can I qualify for a Cost Plus with a pre-existing medical condition? 

Yes, you can. A pre-existing health condition doesn’t affect your eligibility for a Cost Plus plan.