ERISA and COBRA Implications for EAPs and Wellness Programs
There is a growing trend for employers to provide employee assistance programs (“EAPs”) and wellness programs for the benefit of their employees. Typically, the employer pays for benefits under these programs out of its general assets. These programs are designed to reduce health care costs, reduce absences from work, and increase productivity by improving the physical and mental health of employees and helping them with life issues such as substance abuse, depression, finances, and child care. Although the programs may appear simple, employers should be aware that EAP and wellness programs may be (i) welfare benefit plans subject to ERISA and (ii) health plans subject to COBRA.
Under ERISA, an “employee welfare benefit plan” is a plan or program maintained by an employer that provides medical, surgical, or hospital care or benefits, or benefits in the event of sickness or accidents to participants. An employee welfare benefit plan is subject to ERISA’s fiduciary rules, claims procedures, and plan document requirements (including the requirement to provide participants with a summary plan description), and may be required to file an annual return (Form 5500).
Application to EAPs. An EAP that only provides referral services to therapists, counselors, or other medical providers does not provide medical care or benefits in the event of sickness and is not considered a welfare benefit plan under ERISA. In contrast, if the EAP is staffed by trained counselors and provides counseling sessions for mental health or substance abuse, the EAP provides medical care and/or benefits in the event of sickness and is subject to ERISA. An EAP may provide both ERISA medical benefits and other benefits that are not subject to ERISA (e.g., financial counseling). Some employers treat the entire EAP as subject to ERISA, while others may describe all benefits in the EAP summary plan description, but include disclaimers in the ERISA rights and claims procedures provisions for non-ERISA benefits.
Application to Wellness Programs. If an employer offers only discount gym memberships and free seminars on exercise and nutrition, the employer’s wellness program does not provide medical care or benefits in the event of sickness and is not subject to ERISA. In contrast, if the employer’s wellness program provides physical exams, biometric screenings, health questionnaires with feedback or counseling, or similar benefits, the wellness program provides medical care and is subject to ERISA.
Under ERISA and the Internal Revenue Code, a plan sponsor must offer COBRA continuation health coverage to any qualified beneficiary that loses coverage under a “group health plan” because of a qualifying event, such as termination of employment. For purposes of COBRA, a group health plan is a plan maintained by an employer to provide health care to employees and former employees and their families through insured or self-insured arrangements. The term “health care” generally includes the diagnosis, cure, mitigation, treatment, or prevention of disease, and any other undertaking for purposes of affecting the structure or function of the body.
Application to EAPs. If an EAP maintained by an employer provides only referral services, then it does not provide health care and is not a health plan for purposes of COBRA. In contrast, if the EAP provides health care (e.g., substance abuse or mental health counseling), it must provide COBRA continuation coverage to employees and dependents (qualified beneficiaries) that lose health care coverage under the EAP due to a qualifying event. As a technical matter, COBRA must be offered only for the portion of the EAP that provides health benefits; an employer need not offer extended coverage for legal services or financial counseling. However, it may be difficult to carve out non-health benefit services for EAP continuation coverage and COBRA premiums.
If the EAP provides health care and is available only to employees (and dependents) that are enrolled in the health plan, the EAP is part of the health plan and the employer may issue a single COBRA notice for the health plan and the EAP when a qualifying event occurs. A qualified beneficiary may elect COBRA under the EAP only if he or she elects COBRA under the health plan and he or she will pay a single COBRA premium to continue both benefits. In contrast, if the EAP provides health care and is a separate plan (employees may elect EAP benefits without participating in the health plan), COBRA administration is more complex. A qualified beneficiary must be able to make a separate COBRA election for health care under the EAP and pay a separate COBRA premium for EAP continuation coverage.
Neither the IRS nor the Department of Labor (“DOL”) has issued official guidance on how to determine the COBRA premium for an EAP. An employer could charge 102% of its cost to cover the individual in the EAP (typically EAPs charge a fee per covered individual), although it may be appropriate to carve out non-health care benefits from the COBRA premium. Alternatively, since EAP fees tend to be very low (e.g., $1 per employee per month), the employer could offer the EAP to qualified beneficiaries free of charge for the COBRA continuation period (18 months, 29 months, or 36 months depending on the qualifying event). The qualified beneficiaries would still receive a COBRA notice, but the notice would state that the employer was subsidizing the COBRA continuation coverage. It may be less costly for an employer to provide free COBRA continuation coverage than to administer COBRA premiums.
An employer may streamline COBRA requirements by making the EAP available only to employees who participate in its health plan. However, this approach may deprive some employees of EAP benefits, and the employer would still need to make EAP health benefits available to qualified beneficiaries who elect COBRA under the health plan.
Application to Wellness Programs. Wellness programs that offer only gym discounts and educational programs are not health plans subject to COBRA. In contrast, wellness programs that offer health care (screening, counseling, flu shots, physicals, or health-related contingent reward programs) are health plans subject to COBRA.
If the wellness program provides health care and is offered only to employees that enroll in the employer’s health plan, the wellness program is treated as part of the health plan and the employer may issue a single COBRA notice for the health plan and wellness program when a qualifying event occurs. A qualified beneficiary will make a single election and pay a single premium for COBRA coverage. In contrast, if the wellness program provides health care and is a separate health plan (offered to employees regardless of their participation in the health plan), then qualified beneficiaries who lose coverage due to a qualifying event must be offered separate COBRA coverage under the wellness program and pay a separate COBRA premium.
COBRA continuation coverage for wellness programs that offer on-site benefits presents special challenges. On-site facilities that further general health (e.g., a gym) or provide first aid for injuries incurred during working hours are exempt from COBRA. In contrast, an on-site program for screenings, flu shots, or counseling would be subject to COBRA. An employer, however, may not want former employees returning for on-site benefits. Because COBRA generally does not provide a right to treatment at a specified location, an employer may arrange for benefits that are provided on-site to be available to COBRA beneficiaries at a separate location (e.g., a clinic or drug store). Alternatively, the vendor for the wellness program may be willing to make the wellness program directly available to former employees.
Neither the IRS nor the DOL has issued guidance on how to determine the COBRA premium for wellness programs. If an employer pays a fee for each covered employee, the employer should be able to charge a COBRA premium equal to 102% of the fee. If the cost to the employer ranges based on the programs elected by the employees, however, it will be more difficult to determine the COBRA premium. Since wellness programs typically cost more per employee than EAPs, it may not make sense for an employer to offer free COBRA continuation coverage. As a practical matter, it is unlikely that many qualified beneficiaries will elect COBRA continuation coverage if they are required to pay 102% of the cost of the wellness program.
Although it is beyond the scope of this blog post, employers should be aware that EAPs and wellness programs that qualify as health plans under ERISA and COBRA may be subject to other laws governing health plans. These include HIPAA privacy and security rules, the HIPAA nondiscrimination rules, the Americans with Disabilities Act, and the Genetic Information Nondiscrimination Act of 2008. Employers should review their plans and consult with legal counsel to ensure compliance with these laws.
Please contact a member of our Employee Benefits & Executive Compensation Group if you have any questions regarding the application of ERISA or COBRA to your EAP or wellness program.