What expense category is Employee Assistance Program (EAP) Fees?

Supporting employee well-being is a cornerstone of a healthy and productive workplace. Employee Assistance Programs (EAPs) are a key benefit that provides confidential support for employees facing personal or work-related challenges. For employers, the fees paid to provide this valuable service are a deductible business expense.

To ensure deductibility, it's important for accountants and business owners to understand how to categorize EAP fees and what IRS rules apply properly. This guide covers the essentials of classifying EAP costs, the records you need to keep, and how to track these expenses efficiently.

Employee Assistance Program (EAP) Fees Category

The fees you pay to a third-party provider for an Employee Assistance Program are an ordinary and necessary business expense. The IRS categorizes these costs under Employee Benefit Programs.

Specifically, as outlined in IRS Publication 535, EAPs fall under the umbrella of deductible fringe benefits, similar to accident and health plans or other welfare benefit funds. On a company's chart of accounts, these fees should be recorded in a specific expense account, such as Employee Benefits, to distinguish them from regular wages.

Important Considerations When Classifying EAP Fees

While EAP fees are generally deductible, there are several key points to consider to ensure compliance.

EAPs as a Fringe Benefit

An EAP is a form of compensation for the performance of services, commonly referred to as a fringe benefit. The cost of providing fringe benefits is generally deductible by the employer. In most cases, the value of the EAP benefit is also excludable from the employee's gross income, meaning it is a tax-free benefit for them.

Formal Plan Requirement

For employer contributions to be deductible and benefits to be tax-free to employees, the EAP must be part of a formal, written plan. This plan should be communicated to all eligible employees and should not discriminate in favor of highly compensated employees or owners.

Distinction from Health Insurance

While EAPs often include services like short-term counseling, they are typically considered separate from a company's primary group health insurance plan. The fees paid to the EAP provider are deducted as an employee benefit program expense, distinct from health insurance premiums, which have their own specific rules (such as the self-employed health insurance deduction).

Examples of EAP Fees and Services

The deductible expense is the fee you pay to the EAP provider. This fee gives your employees access to a bundle of confidential services, which often include:

• Short-term counseling for stress, grief, or other personal issues.
• Referrals for mental health or substance abuse support.
• Financial wellness and credit counseling services.
• Legal guidance for matters such as will preparation and family law.
• Childcare and eldercare referral services.

Tax Implications and Recordkeeping

To deduct EAP fees, you must report them correctly and maintain the required documentation.

How to Report the Deduction

For a sole proprietor filing a Schedule C (Form 1040), fees paid for an EAP are deducted under Part II, Line 14, Employee benefit programs (other than Pension and profit-sharing plans).

What Records to Keep

You must keep supporting documents to substantiate all your business expenses. For EAP fees, your records should include:

• The service agreement or contract with the EAP provider.
• Invoices from the provider detailing the service period and fees.
• Proof of payment, such as canceled checks or credit card statements.
• The written plan document that is provided to your employees.

How Fyle Can Automate Tracking of EAP Fees

Fyle simplifies the management of recurring benefit payments, such as EAP fees, ensuring every cost is captured and ready for tax time.

• Centralized Invoices: Have your EAP provider email invoices directly to Fyle, where they are automatically captured and organized.
• Automate Recurring Expenses: Set up rules to automatically categorize your monthly or annual EAP fee to the correct GL account.
• Create a Clear Audit Trail: Fyle consolidates the provider contract, invoices, and proof of payment into a single, easily accessible digital record.
• Sync with Your Accounting System: The categorized EAP expense syncs directly to your Employee Benefits account in QuickBooks, Xero, NetSuite, or Sage Intacct.