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XXXXX
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File: 11590-6
XXXXX
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Dear XXXXX:
We are writing in response to your letter of November 27, 1995 wherein you request our comments on the GST treatment of fees related to "cost-plus" arrangements in view of Policy Statement No. 136 entitled "Administrative Services Only With Stop-Loss".
The above policy statement deals with third party administrative services under an Administrative Services Only or "ASO" contract that applies to an employer's self-insured benefit arrangement. In these situations the employer hires a third party (such as an insurer) to undertake benefit payment and administration for the employer's benefit arrangement. Generally, supplies of third party administrative services are subject to GST due to the application of paragraph 123(1)(t) of the definition of "financial service" of the Excise Tax Act ("Act") and the Financial Services (GST) Regulations ("Regulations"). Policy Statement No. P-136 "Administrative Services Only With Stop-Loss" clarifies that in certain instances administrative services may be exempt if the insurer also provides stop-loss coverage for the purpose of limiting the employer's risk under the self-insured benefit arrangement.
However, in the scenario you outline, a policyholder's employees are provided with medical benefit coverage through an insurance policy issued by an insurer. This is not an ASO arrangement as it is the insurer who underwrites the risk and is liable for the claims. With respect to the medical coverage of certain employees, the employer may also enter into a "Reimbursement Agreement" (sample provided) which is understood to be a "cost-plus arrangement". Under this type of arrangement, the employer reimburses additional specified expenses of certain employees. above cost-plus arrangement is not part of the medical insurance policy supplied by the insurer to the employer for the benefit of the employees. The insurer is not at risk for these expenses as the employer is billed for the amount of the expenses reimbursed plus an administration fee.
The sample reimbursement agreement provides that:
• Policyholder and the insurer agree that this agreement shall in no way affect or modify the insurance policy issued to the policyholder. However, the existence of this insurance policy shall be the main consideration of this agreement and if the policy terminates for any reason whatsoever, this agreement shall terminate at the same date.
• Policyholder is solely responsible for the validity of all claims.
• It is agreed that upon the specific request from the Policyholder, the insurer will reimburse the employees designated in Appendix A and their dependents all expenses incurred and stated in Appendix A and not covered by the insurance policy but nonetheless eligible under the taxation legislation and not covered by public insurance plans.
• In consideration for the service provided by the insurer, the Policyholder will reimburse the insurer all sums reimbursed under this agreement plus any applicable administration fees and taxes if the total claim is less than $____. Should the claim equal or exceed $____, Policyholder agrees to pay any sums due with the request.
• The agreement shall take effect on_______and expire on____, unless terminated in the manner described above in the agreement.
It is your view that cost-plus arrangements of this nature, covered by an agreement which is related to the medical insurance policy issued by the insurer, is in respect of a financial instrument issued by a "person at risk" i.e. the insurer. Consequently, the administrative service provided by the insurer to the employer on a "cost-plus" basis would be an exempt financial service as it would not fall within the definition of a prescribed service for purposes of paragraph 123(1)(t) and the Financial Services (GST) Regulations.
In order to determine if a particular administrative service is supplied with respect to an instrument by a "person at risk", the "instrument" must be first identified. Under the sample "Reimbursement Agreement", the administrative service provided by the insurer is with respect to the agreement between the employer and its employees to provide for the coverage of additional expenses not covered under the insurance policy. The employer has undertaken to supply insurance coverage to its employees to which it is at risk for these additional benefits and not the insurer.
Since the insurer does not issue the insurance policy for the "cost-plus" benefits or issue an insurance policy in respect of the employee-employer insurance contract, it is not a "person at risk" under the Regulations with respect to the administrative service described in the sample reimbursement agreement.
As such, the fees charged as consideration for the supply of administrative services under the reimbursement agreement are subject to GST as the service falls under subsection 4(2) of the Regulations. The administrative service would be considered as a prescribed service under paragraph 123(1)(t) of the definition of the financial service and is accordingly a taxable supply.
The above comments are general in nature and should not be construed as determinative in any given fact situation. Further details would be required in order to apply these comments to a given set of facts. Specifically, Memorandum 1.4: Goods and Services Tax Rulings, outlines the conditions and circumstances where the Department will provide definitive rulings to a particular registrant.
If you have any further questions, please contact Roy Osudar at (613) 952-9220.
J. Sitka
A/Director
Financial Institutions and
Corporate reorganizations
GST Rulings and Interpretations
File #11950-1
Ref. ss. 123(1)
Document #1600
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