By Alan McEwen

Extended health coverage is a benefit offered by many employers—usually provided under a group insurance contract with one of the major insurance companies such as Sun Life, Manulife or The Co-operators.

Emergency travel benefits are a standard part of such extended health offerings. Regarding emergency travel benefits, insurers will, among other things, reimburse travel costs when return flights are missed due to illness, accident or hospitalization.

However, there are due limits to such emergency travel costs, and crossing that line can cost employers.

PHSPs Cover ‘Emergency’ Travel
The term used in the federal Income Tax Act for extended health coverage is Private Health Services Plan (PHSP). The employer payment of PHSP premiums and any benefits paid out of a PHSP to employees are not taxable benefits for federal source deduction purposes. However, this tax-free treatment requires that the coverages offered by PHSPs be limited to eligible medical expenses for purposes of the federal medical expense income tax credit.

There are two basic variants on the types of travel that qualify as a medical expense. One involves travel by ambulance and the other travel to obtain medical services.

The cost of travel by ambulance is a medical expense if the travel is to or from a hospital. For example, if an employee travelling abroad is taken directly by air ambulance to a hospital in Canada, this constitutes a legitimate medical expense; in contrast, returning by ambulance to the employee’s home from a holiday resort is not.

Four Core Criteria
The cost of travel to obtain medical services is a medical expense, if all four of the following criteria are met:

• To obtain medical services, a patient travels from the place where the person lives;
• Substantially equivalent medical services are not available without this travel;
• There are at least 40 kilometres between the place where the person lives and the place where medical services are sought; and
• The nature and cost of the travel is otherwise reasonable in the circumstances and is by a reasonably direct route.

For example, I live in Qualicum Beach on Vancouver Island. On the Island, certain medical treatments are only available in Victoria, which is roughly 160 kilometres away. If I had to travel to Victoria for medical services that were not available in Qualicum Beach, the related expenses, including food and accommodation, would be a medical expense for PHSP purposes. This includes costs related to a single person as needed to accompany me, if the medical practitioner concerned specifies in writing that I am unable to travel on my own.

You can see from the above that at least some of the emergency travel services included in extended health benefits would not qualify as medical expenses for PHSP purposes.

Potential Risks of Emergency Travel Inclusion
So what’s the potential consequence for a PHSP including such emergency travel benefits? This risks having the Canadian Revenue Agency (CRA) revoke the tax-free status of the PHSP. Instead, the CRA could treat the plan as an employee benefit plan or an employee trust. As such, the provision or payment of benefits to employees would be subject to income tax source deductions. Where extended medical coverage was self-insured, CPP contributions would apply. Where benefits under such self-insured coverage were paid in cash to employees, such payments would also be subject to EI premiums.

The risk is not insignificant and stems from including non-medical expense travel benefits in PHSP coverage, whether or not such benefits are actually used by employees.

Plan Ahead to Protect PHSP
Given this risk, I would recommend that HR and payroll professionals, benefit providers and insurance companies consider the following options:

• Stakeholders in the benefits industry should approach the CRA for administrative relief, and a formal ruling to determine that emergency travel benefits, so long as they were in respect of a legitimate medical event or need, would not jeopardize the tax-free status of a PHSP;
• Insurance companies should consider separating such emergency travel benefits from the other extended health coverages in their PHSP offerings; and
• Employers might consider offering emergency travel services on a self-administered and self-insured basis, so that the source deduction implications would only arise employees actually used these benefits.

Alan McEwen is a Vancouver Island-based HRIS/payroll consultant and freelance writer with over 20 years’ experience in all aspects of the industry. He can be reached at armcewen@shaw.ca, 250.228.5280 or visit www.alanrmcewen.com for more information.