There’s a Place for Cost Plus
Have you heard about Cost Plus?
A lot has been said about the use of Cost Plus on your benefit plan and that CRA has been targeting these types of perks on benefit plans. The truth is Cost Plus can be used strategically as a tax-free employee perk and can positively contribute to the sustainability of a plan and assist with the attraction and retention of key employees. Let’s look at when Cost Plus can and should be used to augment your benefit plan.
What is Cost Plus?
Cost Plus is for using specific class groups and one-time health and dental care costs that either exceed the benefit limits or are not covered by a group plan. This is not encouraged to be an across-the-board benefit for all employees but perhaps for an executive class member. An example may be for a company to pay for laser eye surgery or an excessive dental charge covered through the group plan or only partially covered. This allows the employee to have exceptional costs paid for as an expense to the company and a tax-free benefit.
Why was CRA targeting Cost Plus Expenditures?
In recent years, CRA had been targeting companies that were using CP, but this was principally targeting business owners who were using it as a benefit to avoid paying taxes. If caught, the business owners could have the expense reversed and taxed at the individual’s marginal tax rate. Provided that it’s not an exclusive benefit for owners and available for non-owner members, you should be safe in setting one up. The other caveat is to ensure that all CP expenses submitted are considered “fair and reasonable”. Again, this isn’t exclusive to CP benefits but applies to all benefits in general.
The Advantages of Using Cost Plus
- CP doesn’t add to the claims experience of your benefit plan. Because Cost Plus isn’t directly attached to your benefit plan, it doesn’t weigh your benefits experience, thus not affecting your renewal costs.
- Unlike a Health Spending Account, Cost Plus are usually anomalies in expenses. They usually represent a one-time expense; thus isn’t always an annual expense.
- CP has the unique ability to give an additional perk to Executives or a special class of employees who can get exceptional health expenses paid for as a tax-free benefit.
- Because CP expenditures are usually one time expenses, the administrative fees to process them should be greatly reduced over what you would typically see on a regular benefit plan.
- If used strategically, CP can help contribute to the overall sustainability of a company benefit plan. As an example, incorporating a CP component to your plan versus adding a significant major dental component to your overall plan will greatly reduce your cost exposure and not subject your plan to significant renewal increases.
Where Companies Have Run Into Problems with Cost Plus
In the past, many business owners have leveraged Cost Plus to put exceptional health and dental costs through their business as an expense. However, making Cost Plus available to classes other than Owners will eliminate your chances of being deemed a Shareholder benefit and be seen as a legitimate business expense and tax-free benefit.
Final Say on Cost Plus
Cost Plus has a place on your benefit plan and is mostly a tool for attracting and retaining senior executives. However, provided that the benefit extends beyond the Ownership group and allowable expenses are “fair and reasonable,” you should not find yourself in the crosshairs of CRA’s auditing team.
When looking at the overall compensation of your executive team, the ratio of salary to health benefits would be more likely to be aligned to lesser paid employees and their ratio of salary to health benefits if a CP scenario is included in the plan.
Cost Plus can be used as a strategic and integral part of your executive team’s compensation plan.