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

Emergency travel benefits are a standard part of such extended health offerings. As emergency travel benefits, insurers will, among other things, reimburse travel costs, when return flights are missed due to illness, accident or hospitalization. For example, if an employee misses a return flight home from a holiday package, due to illness, the insurer will reimburse the cost of a new booking, to replace the missed flight.

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 for federal source deduction purposes. However, this tax-free treatment requires that the coverages offered by PHSPs be limited to eligible medical expenses.

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 it’s travel to or from a hospital. For example, if an employee, while travelling abroad, is taken directly by air ambulance to a hospital in Canada, that’s a legitimate medical expense. Returning by ambulance to the person’s home from a holiday resort, by contrast is not.

The cost of travel to obtain medical services is a medical expense, if all 4 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 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.

So what’s the potential consequence for a PHSP including such emergency travel benefits? This risks having the CRA revoke the tax-free status of the PHSP. Instead, the plan would likely be treated by the CRA 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.

This risk comes from including non-medical expense travel benefits in PHSP coverage, whether or not such benefits are actually used by employees.

Given this risk, I would recommend that HR and payroll professionals, benefit providers and insurance companies should consider the following options:

• Stakeholders in the benefits industry should approach the CRA for administrative relief, a formal ruling 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 only source deduction implications would be when 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.