DO YOU REALLY KNOW WHO IS USING YOUR HEALTH PLAN DOLLARS?

By: Paul Cantwell, President, HealthCorp Solutions

How can you be sure that your health plan is covering only those that are eligible? The honor
system has its risks. Ineligible dependents increase the cost of health care for everyone! A
dependent eligibility audit is the way to be sure.

The purpose of a dependent eligibility audit is to identify dependents that should no longer be
covered. Examples include children that have met maximum age or student status, divorced
spouses, or children impacted by changes in custody arrangements. The advantage to an
employer in performing an audit is reduced exposure to greater health care costs. Estimates are
that 5 to 15 percent of covered dependents are not actually eligible. The average cost of a
dependent on a typical health plan is $3,000 per year.

Along with the internal controls and procedures relative to controlling plan costs, ERISA mandates
that plan sponsors “manage plans for the exclusive benefit of participants and beneficiaries” – Section
401 (a) (2) of the Department of Labor’s Compliance Guide. The audit serves to provide evidence of
adequate financial controls that reduces the risk of fiduciary liability.

When planning an audit, an employer should consider a) whether all plan documents consistent
in defining dependents b) what will the scope of the audit be and who will perform it, c) what
documents will satisfy proof of eligibility for various types of dependents, d) what will be the
message communicated to employees, e) how will employees perceive an audit, f) are there
other employee relations issues going on and g) how will privacy issues be addressed?

For most employees, validating that his/her dependents meet the eligibility standards of the employer’s
benefit plan is not a high priority. For example, an employee may be unaware of the need to remove a
college aged child who has dropped out of school or graduated. Another typical example is when a
divorce has occurred and the employee neglects to remove the ex-spouse from the benefit plan. In
some cases, the employee is fully aware of the eligibility rules and chooses to try to obtain benefits for
an ineligible “dependent” regardless of the plan eligibility rules.

The audit will also serve to remind employees of the importance of communicating dependent changes
to the employer as they occur.

Typically there are two steps to a dependent audit.

Employers establish a period of amnesty where employees can voluntarily remove ineligible
dependents. Employees are notified by letter, explaining eligibility rules. An employee will then
review all covered dependents for status, and no penalty will apply to those dependents removed
because they no longer qualify. Employers generally give employees one month to respond.
Ineligible dependents are terminated at the end of the following month.

For all remaining dependents after the initial amnesty period, the verification phase would
require employees to provide documentation to verify dependent status/relationship. Documents
must establish both a dependent relationship and that the relationship still exists.

If an employee is unable to establish a dependent relationship, employer may impose penalties

or seek reimbursement for claims paid for ineligible dependents.
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Other issues to consider include that disenrollment may not be a COBRA qualifying event, thus an
employer may choose to offer COBRA to all (if fully insured, get permission from your insurer),
not just those that are truly COBRA eligible as a result of the audit. An employer may need to
retroactively adjust employee W-2s if an employee made pre-tax contributions for an ineligible
dependent.

It is recommended that plan documents be amended to reflect the process to be followed in

determining dependent eligibility—frequency of audits, verification process, and penalties at the
point of new employee enrollment, etc.

Many companies find that hiring an independent audit firm may be desirable. This might be done
on a risk sharing basis where payment is based on the percentage of recovered amounts or
estimated savings. Using an outside firm might also help with employee perception of the
independence and objectivity of an audit.

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.

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