Most EAPs Are Group Health Plans Subject to COBRA
By Brian Gilmore | Published February 24, 2022
Question: When is an employee assistance plan (EAP) a group health plan subject to COBRA?
Short Answer: Whether an EAP is subject to COBRA is determined by its structure and benefits. EAPs are typically a group health plan subject to COBRA because they provide access to trained counselors offering therapy, which is a medical benefit. Very limited EAPs that provide only referrals by individuals who are not trained counselors are not group health plans, but that approach is uncommon.
General Rule: COBRA Applies to Group Health Plans
The COBRA rules apply to employer-sponsored group health plans. A plan is a group health plan if it provides any medical care as defined in Internal Revenue Code §213(d), which generally is amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease.
IRS Publication 502 provides a useful summary of expenses that qualify as §213(d) medical expenses. Included among the list of medical expenses is mental health therapy received as medical treatment.
For more details, see our** 2022 Newfront COBRA for Employers Guide.**
EAPs: Typically Subject to COBRA
EAPs provide a variety of support programs to assist employees and eligible dependents, primarily in the areas of mental and emotional well-being such as alcohol and other substance abuse, stress, grief, family problems, and psychological disorders. Although plan designs vary considerably, EAPs generally offer free and confidential assessments, short-term counseling, referrals, and follow-up services for employees. EAP counselors may also assist in coping with workplace violence, trauma, and other emergency response situations.
Our best insight as to the ERISA and COBRA status of EAPs comes from DOL advisory opinion letters addressing whether EAPs qualify as an ERISA welfare benefit plan under ERISA §3(1). EAPs that qualify as an ERISA welfare benefit plan providing medical benefits will also qualify as a group health plan subject to COBRA.
The DOL issued a trio of these advisory opinions addressing whether specific EAP plan designs provide medical benefits in the 1980s and early 1990s. Those letters remain the primary guidance employers can rely on in this area today.
That guidance confirms the dividing line for determining whether an EAP is a group health plan subject to COBRA is whether the plan has trained professionals providing medical counseling. For example, most EAPs offer some form of mental health therapy by licensed professionals. This form of counseling qualifies as a medical benefit, and therefore such EAPs are group health plans subject to COBRA.
The DOL found EAPs to be subject to ERISA as providing medical benefits (and thereby subject to COBRA as a group health plan) in advisory opinions reviewing the following plan designs:
EAP that offers counselors with a degree in psychology providing confidential sessions, identifying problems, creating a plan of action, and making referrals to additional appropriate services; and
EAP that offers counselors trained in psychology and social work providing assistance with mental and physical health for a wide range of problems, including drug and alcohol abuse, stress, anxiety, depression, and making referrals to additional appropriate services.
Key Point: The vast majority of EAPs will fall squarely into this ERISA welfare benefit plan and COBRA group health plan category as clearly providing medical benefits - without any significant analysis needed to assess.
On the other hand, the DOL found an EAP not to be subject to ERISA (and thereby not subject to COBRA) in an advisory opinion letter where it determined the program’s benefits to be non-medical in nature. In that case, the EAP was limited to a phone referral service where the coordinators had no special training in counseling, psychology, social work, public health, or any other related discipline. The representatives of the plan simply made referrals to appropriate professionals, agencies, or clinics equipped to provide counseling services.
EAPs that are limited to this referral-only type arrangement do not provide medical benefits and therefore are not subject to COBRA. However, it is uncommon for EAPs to have no staffed personal (either in-house or on a contractual basis) with special training in counseling or a related discipline. Most EAPs provide far more than simply making referrals to unaffiliated outside clinicians. Therefore, this “referral-only EAP” exception from COBRA rarely applies except for the most bare bones types of offerings.
Dealing with COBRA for EAPs: Practical Complications and Workarounds
Employers and COBRA TPAs commonly complain about the need to include EAPs in COBRA election notices, as well as the burden to process premium collection for qualified beneficiaries electing continuation coverage for the benefit. Even though the employer can still charge 102% of the cost, it can seem an inappropriate and inconsequential burden given the low COBRA participation rates and low cost of coverage for most EAPs.
One workaround approach some employers take—upon approval from the EAP provider—is to simply continue active EAP coverage for the full 18-month or 36-month maximum coverage period, depending on the qualifying event. The COBRA deferred loss of coverage rules provide that additional periods of active coverage after the triggering event apply toward the COBRA maximum coverage period to reduce the period the qualified beneficiary may continue coverage through COBRA.
This approach therefore avoids the need to offer a COBRA election notice and process the standard COBRA premium collection administration because there will be no right to continue coverage through COBRA after the end of the extended period of active coverage.
The downside of the workaround’s administrative simplification is the increase in cost (albeit small for most EAPs) to continue coverage for all employees losing EAP coverage for a significant period. Employees would also need to be notified of the ability to continue EAP coverage automatically for the maximum coverage period.
Dealing with COBRA for EAPs: LTD Embedded EAP Arrangements
Many employers offer long-term disability (LTD) coverage with an EAP component. This is frequently referred to as an “embedded” or “bundled” EAP arrangement. A group health plan benefit (such as an EAP) that is offered within another non-group health plan benefit (such as an LTD) is still a group health plan benefit subject to COBRA.
In other words, even though the LTD benefit itself is not subject to COBRA, the EAP component of the LTD offering is subject to COBRA. Employers should work with the LTD carrier to determine the appropriate fair market value of the EAP component when establishing the cost of continuation coverage through COBRA. Where LTD carriers are not forthcoming or generally unhelpful (e.g., referring to the full LTD premium or stating that there is a $0.00 EAP component rate—both real-life examples), employers should generally attempt to determine a reasonable estimate of the EAP cost based on similar stand-alone EAP offerings.
Employers might also consider simply charging a $0 COBRA premium rate in these situations given how uncommon it is for an employee to elect the EAP. The administrative burden associated with collecting such a small premium amount (e.g., $2.50/month) may outweigh the interest in having qualified beneficiaries pay for the continuation coverage.
Dealing with COBRA for EAPs: Failure to Comply
Employers that are tempted to dismiss the need to offer COBRA for the EAP should carefully consider the large potential liability associated with failures to offer COBRA coverage.
For example, employers could be subject to an excise tax of $100/day for failure to timely provide the COBRA election notice for the EAP. That excise tax increases to $200/day if there is more than one affected individual for that qualifying event (e.g., spouse, child). Employers generally must self-report this excise tax liability on IRS Form 8928.
Furthermore, failure to provide EAP rights under COBRA could give rise to a potential lawsuit from the affected qualified beneficiaries. Such litigation could result in the employer being held responsible for self-funding the expenses that would have been covered by the EAP through COBRA.
For more details, see our prior post: Failure to Timely Provide COBRA Election Notices.
ERISA: Reminder That Standard ERISA Requirements Apply
A group health plan that is subject to COBRA is also an ERISA welfare benefit plan. This means the EAP needs to be included in the wrap plan document and wrap SPD. Furthermore, all the standard ERISA rights and obligations (e.g., the §404(a)(1) fiduciary duties) will apply.
Employers will also need to report the EAP on the Form 5500. In most cases, employers have a “mega wrap” plan (typically Plan 501) to encompass most or all health and welfare benefits, including an EAP. In that situation, the plan’s Form 5500 would simply reflect the EAP by including Code 4A (other health benefit) in Line 8b, and including that the plan funds and provides benefits from the “General assets of the sponsor” in Lines 9a and 9b (assuming the program is self-insured). In the more uncommon situation where the EAP is insured, there would be a Schedule A for the program.
For more details, see our Newfront Office Hours Webinar: ERISA for Employers.
Excepted Benefit Status: Conditions to Qualify and Implications
Most EAPs qualify as an excepted benefit. Although EAPs that are excepted benefits remain broadly subject to most group health plan laws such as ERISA and COBRA, excepted benefits are not subject to the ACA market reform provisions or the HIPAA portability requirements.
EAPs must satisfy all of the following conditions to qualify as an excepted benefit:
No Significant Medical Benefits: The EAP cannot provide significant benefits in the nature of medical care;
No Coordination with another Group Health Plan: The EAP cannot be coordinated with benefits under another group health plan by meeting the following two requirements:- No Exhaustion: Participants in the other group health plan cannot be required to use and exhaust benefits under the EAP (i.e., the EAP cannot act as a gatekeeper) before becoming eligible for benefits under the other group health plan; and- No Participation Link: Participant eligibility for benefits under the EAP cannot be dependent on participation in another group health plan;
_No Premiums: _The EAP cannot require employee contributions to participate (i.e., it must be fully employer-paid); and
No Cost-Sharing: The EAP cannot have any cost-sharing for its services (i.e., no deductibles, copays, or coinsurance).
The most difficult element to interpret is the first requirement that the EAP not provide “significant benefits in the nature of medical care.” For example, there is no specific limit on the number of counseling sessions that the EAP can offer and still remain within this definition. The only guidance in the regulations is a generic statement that employers are to take into account “the amount, scope, and duration of covered services,” although the preamble does provide somewhat more context for the determination.
For more details, see our prior post: ACA and HIPAA Excepted Benefits.
(1) The terms “employee welfare benefit plan” and “welfare plan” mean any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services, or (B) any benefit described in section 302(c) of the Labor Management Relations Act, 1947 [29 USC §186(c)] (other than pensions on retirement or death, and insurance to provide such pensions).
_(1) _Group health plan. The term “group health plan” means an employee welfare benefit plan providing medical care (as defined in section 213(d) of the Internal Revenue Code of 1986) to participants or beneficiaries directly or through insurance, reimbursement, or otherwise. Such term shall not include any plan substantially all of the coverage under which is for qualified long-term care services (as defined in section 7702B(c) of such Code). Such term shall not include any qualified small employer health reimbursement arrangement (as defined in section 9831(d)(2) of the Internal Revenue Code of 1986).
The term “medical care” means amounts paid—
(A) for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body,
Treas. Reg. §1.213-1(e)(1)(ii):
(ii) Amounts paid for operations or treatments affecting any portion of the body, including obstetrical expenses and expenses of therapy or X-ray treatments, are deemed to be for the purpose of affecting any structure or function of the body and are therefore paid for medical care. Amounts expended for illegal operations or treatments are not deductible. Deductions for expenditures for medical care allowable under section 213 will be confined strictly to expenses incurred primarily for the prevention or alleviation of a physical or mental defect or illness. Thus, payments for the following are payments for medical care: hospital services, nursing services (including nurse’s board where paid by the taxpayer), medical, laboratory, surgical, dental and other diagnostic and healing services, X-rays, medicine and drugs (as defined in subparagraph (2) of this paragraph, subject to the 1-percent limitation in paragraph (b) of this section), artificial teeth or limbs, and ambulance hire. However, an expenditure which is merely beneficial to the general health of an individual, such as an expenditure for a vacation, is not an expenditure for medical care.
DOL Advisory Opinion 83-35A:
Under the Assistance Program, the employer has contracted for, and bears the cost of, an individual (the Counselor) with a degree in psychology to be at the company each Wednesday for approximately 6 hours. Employees may request an appointment for a confidential session with the Counselor and managers may also suggest to an employee that he or she seek such a session. During the session, the Counselor’s function is to provide confidential and professional assistance to the employee and eligible family members. Once the Counselor identifies the problem, a plan of action is suggested. If the employee agrees with the plan of action, a referral is made to an appropriate professional person, agency, or service clinic. The Counselor then serves as a coordinator with the outside service.
The booklet describing the Assistance Program indicates that health problems and health-related personal problems are among those which are dealt with through the Assistance Program. In addition, the Assistance Program apparently provides assistance in connection with problems involving the mental health of employees and their dependents. Under these circumstances, we believe that the Assistance Program provides “benefits in the event of sickness,” which are among the benefits listed in section 3(1) of ERISA.
DOL Advisory Opinion 88-04A:
The Program provides assistance in dealing with major personal problems affecting mental or physical health. Booklets distributed to employees describe these benefits in detail. Assistance is available for a wide range of problems, including drug and alcohol abuse, stress, anxiety, and depression, marital problems, problems involving troubled children, money and credit problems, and legal problems. The Program excludes benefits for work-related problems. The Human Resources Group, Inc. (Human Resources) is under contract to provide Program services. Human Resources is an independent organization designing and administering employee assistance programs for corporations. Human Resources employees, trained in psychology and social work, counsel Program participants at various locations throughout El Paso, staff a 24-hour hotline, and refer Program participants to additional resources as appropriate.
It is the view of the Department that benefits for the treatment of drug and alcohol abuse, stress, anxiety, depression and similar health and medical problems constitute “medical” benefits or “benefits in the event of sickness” within the meaning of section 3(1). On the basis of your representations, and the submissions accompanying your request, the Program does provide, among other benefits, benefits constituting “medical” benefits or “benefits in the event of sickness” within the meaning of section 3(1).
DOL Advisory Opinion 91-26A:
The Program provides referrals by means of two toll-free numbers listed in the booklet Publix distributes to employees describing the Program. One telephone number used by the Program is staffed by an “employee” in the Publix personnel office. The employee staffing the phone referral service in the Publix personnel office (the EAP Coordinator) has no special training in counseling, psychology, social work, public health, or any other related discipline. The second telephone number connects the employees with a “hotline” provided nationwide at no charge by the National Institute for Drug Abuse (NIDA).
The Program, accordingly, does not appear to provide any employee benefit within the meaning of section 3(1) of ERISA. Neither the Publix toll-free number, staffed by Publix personnel office employees with no special training in counseling or a related discipline, nor the NIDA “hotline” appear to provide more than generally available public information when making telephone referrals to Publix employees. Unlike employee assistance programs identified as employee welfare benefit plans in ERISA Opinions 88-4A and 83-35A (copies enclosed), the Program employs no counselors, either in-house or on a contractual basis, and apparently provides no benefits in addition to referrals an employee could obtain free of charge regardless of employee status.
Therapy: You can include in medical expenses amounts you pay for therapy received as medical treatment.
Lead Benefits Counsel, VP, Newfront
Brian Gilmore is the Lead Benefits Counsel at Newfront. He assists clients on a wide variety of employee benefits compliance issues. The primary areas of his practice include ERISA, ACA, COBRA, HIPAA, Section 125 Cafeteria Plans, and 401(k) plans. Brian also presents regularly at trade events and in webinars on current hot topics in employee benefits law.Connect on LinkedIn