Protecting Your Employee Benefits Plan Through a Dependent Eligibility Audit

As the end of the year approaches, it a good time to talk about making a fresh start in the new year. One way to ensure your employee benefits program gets off to a good start in January is through a series of audits.

Two of the more popular benefits audits are Dependent Eligibility Audits and Claims Audits; both are typically conducted to drive longer-term health plan objectives as well as to receive immediate, short term returns or a one-time recovery of funds. 

By making use of these periodic audits, businesses can more easily control the rising costs of employee benefits, while protecting the program from purposeful fraud or accidental waste. These audits also protect your workforce from unnecessary expenses and possible denials of coverage which could prove financially disastrous.

We'll cover the "ins and outs" of claim audits in another post, but for now, here are some general guidelines to follow with Dependent Eligibility Audits.

Dependent Eligibility Audits 101

Eligibility audits identify plan participants who should be purged from the rolls because they no longer qualify for benefits. Examples include divorced spouses, adult children who age-out of eligibility, and nieces or nephews living with an employee.

According to AON, these audits typically find 5 to 7 percent of dependents do not meet eligibility criteria. Other sources peg the number at closer to 20 percent. With the average cost of covering a dependent costing an employer $3,500 a year, companies can easily lose upwards of hundreds of thousands of dollars when providing health care to ineligible dependents. Losses of this magnitude can affect a company's bottom line, and its ability to fund other important employee benefits.

While dependent audits are primarily seen as a cost control measure, at its heart, they are also a fiduciary responsibility per IRS regulations. Any employer - whether subject to ERISA or not - is obligated to administer their plan according to the rules stated in their plan documents. More importantly, from a practical standpoint, insurance carriers, including stop loss carriers, will deny coverage to enrollees who are not eligible to participate.

Determining who is an eligible dependent according to the rules - and removing those who do not meet the requirements - is important to limit the expenditure of plan resources by reducing ineligible claims.

• The First Step - Consistency: Make sure the plan's dependent definition is the same in all plan documents, contracts, and summary plan descriptions. You do not want to create confusion or an opportunity for misunderstanding who's covered.
  
  
• Communicate! Make sure employees, especially new employees, understand the dependent definition and what that means under the plan's rules. Use concrete examples that show dependents who meets the definition in your plan's communications with employees. Many times employees do not understand that nieces, nephews, or grandchildren may not meet the plan's dependent definition and, therefore, are not entitled to submit claims on their behalf. And it's not uncommon for employees, following a divorce, to get sidetracked and overlook removing a former spouse from their dependent list.

• Explain: The employee communication initiatives should focus on fairness.  Audits can stir resentment among workers who are already besieged by benefits cutbacks or who wonder why the company no longer takes them at their word. Explain that the reason the health plan exists is to provide coverage only for employees and their eligible dependents. Make sure to explain to employees why it's in their best interest to comply with the audit. The health plan’s ability to provide for those it aims to benefit is significantly compromised when ineligible persons receive benefits. Show them how an audit can help keep costs down for all employees and/or save a benefit which might potentially be on the chopping block. Paint a clear picture of how a denial of coverage claim can potentially create massive problems for an ineligible dependent. 

• The Second Step - Amnesty: Employers should establish a period of amnesty when employees can voluntarily remove ineligible dependents without penalty. Employees should be notified by letter, explaining eligibility rules. An employee can then review all covered dependents for status, with no penalty applied to those dependents removed due to ineligibility. Employers generally give employees one month to respond to such notices. Ineligible dependents that are voluntarily removed by employees are then terminated at the end of the following month. The open enrollment period for your benefits plans is a good time to check dependent eligibility status without alarming your employees. If you have a high staff turnover rate, you may want to do this every year. If your employee base is pretty stable, you may find audits every 3 years will fit the bill.

• The Third Step - Verification: For all dependents remaining after the initial amnesty period, employers may choose to implement an optional third step in the auditing process, that of requiring employees to provide documentation to verify dependent status/relationship. Documents should establish both a dependent relationship and that the relationship still exists. Examples may include:
  
  • Marriage certificates 
  • Domestic partner affidavits 
  • Legal documents that establish custody, guardianship or foster care 
  • Birth certificates 
  • Tax forms 
  • Medical documentation of disability 
  • Adoption papers

If an employee is unable to establish a dependent relationship, the employer may impose penalties, terminate coverage or seek reimbursement for claims paid for ineligible dependents. It is not typical for employers to seek out disciplinary action as a result of the initial audit. Some employers also offer an appeals process to give those deemed to have ineligible dependents (or non-respondents) a chance to reinstate their children or spouses.

The Affordable Care Act (ACA) limits an employer’s ability to retroactively remove ineligible dependents from coverage. Under the law, a rescission (or retroactive cancellation of coverage) is permissible only if the individual obtained coverage through fraud or an intentional misrepresentation of material fact and the individual is given at least 30 days’ advance notice of the rescission. An employer can avoid the law’s restrictions on rescissions by canceling coverage on a prospective basis.

Disenrollment may not be a COBRA qualifying event, but an employer may choose to offer COBRA to all, not just those that are truly COBRA eligible as a result of the audit. Self-insured plans should get permission from their stop-loss carriers and insured plans should get permission from their insurers before offering COBRA coverage to all ineligible dependents removed from coverage.

Also, an employer may need to retroactively adjust employee W-2s for those employees who made pretax contributions for an ineligible dependent. For this reason, some employers choose not to seek reimbursements for past claims, but simply to deny coverage to ineligible dependents going forward.

It is recommended that plan documents be amended to reflect the process that will be followed in determining dependent eligibility going forward, such as frequency of audits, verification process at the point of new employee enrollment and penalties.

Many companies choose to hire an independent audit firm. This can be done on a risk sharing basis where payment is based on the percentage of recovered amounts or estimated savings. Using an outside firm can also help with employee perception of the independence and objectivity of an audit. In addition, the auditing process can be cumbersome and time-consuming, so larger companies may find that a third-party auditor more practical. The JP Griffin Group assists employers will finding vetted auditing firms.

It is important to weigh your company resources against the potential payoff of cost control and ongoing risk exposure when deciding whether a dependent eligibility audit is right for your company. To learn more about auditing options or other employee benefits cost control, risk and compliance initiatives, please contact us. We look forward to helping you improve your employee benefits program.