August 14, 2017
As employers search for ways to contain employee benefit plan costs, many are undertaking dependent eligibility audits. The logic and the potential cost savings are compelling. Why pay for something — in this case, coverage for someone not entitled to it under the terms of a benefit plan — if you don’t have to?
According to the results gleaned from one group of these audits, the percentage of ineligible dependents detected ranged between seven percent and 19 percent. With the cost of each employee dependent covered under a health plan averaging about $3,400 annually, the potential savings can be dramatic, even for a small business. The return on investment from dependent eligibility audits can be as high as 40 to 1. Savings should be significant, when you consider that each removed ineligible dependent represents dollars saved year after year.
Although the cost savings can be compelling, they’re not the only reason to conduct a dependent eligibility audit. ERISA mandates that benefit plans be maintained for the “exclusive benefit” of employees and employers as plan fiduciaries are required to operate plans accordingly. Arguably, covering ineligible individuals, which can create additional plan costs for all employees, runs afoul of these requirements.
The purpose of a dependent eligibility audit is to verify that individuals listed by employees as eligible for coverage — primarily spouses and dependent children — indeed meet the plan eligibility requirements. A simple employee certification or affidavit of dependent eligibility does not provide proof and, therefore, an audit requires employees to submit documents that substantiate eligibility.
An audit is a significant undertaking. Assume that you will need to:
- Review health plan documents (and documents for any other plans for which the audit is being conducted) to determine the definitions for all possible eligible dependents.
- Determine the documentation required for substantiating eligibility. For example, in the case of a spouse, this may be not only a marriage license or certificate, but also a recently filed joint income tax return to show that the marriage continues to the present day.
- Establish a time line for informing employees about the audit and a deadline for submitting the required documentation. Develop communications materials accordingly.
- Determine the process by which employees can submit their documentation and set up a mechanism to receive materials.
- Review submitted documents to determine whether they meet the requirements for establishing eligibility. Establish a notification and grace period process for employees who fail to submit materials properly and/or on time. Inform employees of the audit results.
- Since these audits generate a large amount of paper, arrange for secure storageand/or disposal of the materials employees have submitted.
- Chances are the audit will generate questions from employees. That’s why a knowledgeable person or persons must be assigned to field employee inquiries.
Some companies choose to outsource dependent eligibility audits instead of conducting them in-house. Audit service providers cite the potential cost savings that can be achieved and the amount of work involved in a thorough, well-designed audit to argue that contracting for such services delivers a good return on investment. Ask your accountant for guidance.
What Other Design Factors Should You Consider?
The workload associated with a dependent eligibility audit can be substantial. In order to make the process more manageable, some companies audit only a particular dependent group, or a single company division or location at a time, instead of requiring all pertinent employees to submit documentation.
You also need to decide whether to conduct your audit retrospectively (and try to recover claims that shouldn’t have been paid) or on a forward-looking basis only. Many employers choose to precede the audit with an amnesty period during which employees can voluntarily remove dependents from the plan with no penalty.
Since most companies have traditionally run on an honor system when covering dependents — basically taking an employee’s word for it that those dependents enrolled for coverage indeed meet a definition of an eligible dependent — advance communications to alert employees of the audit, and the reasons for it, are critical to employee cooperation and, ultimately, the success of the audit.