As employers search for ways to contain employee benefit plan costs, many are undertaking dependent eligibility audits. The logic and potential cost savings is compelling. Why pay for something — in this case, coverage for someone not entitled to it under the terms of a benefit plan — when you don’t have to?
According to the results of client dependent eligibility audits conducted by HRAdvance, a third-party provider of audit services, the percentage of ineligible dependents detected in such audits ranges from 7% to 19%. And, with each employee dependent covered under a health plan running about $3,400 annually (with this amount varying considerably company to company, according to figures from Aon Consulting), the potential cost savings can be dramatic, even for a small company. Aon cites the potential return on investment from dependent eligibility audits as high as 40 to 1. Savings should be considerable, when you consider that each removed ineligible dependent represents dollars saved year after year.
Though the cost savings are 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 under the plan (primarily spouses and dependent children) indeed meet the plan requirements for eligibility. A simple employee certification or affidavit of dependent eligibility does not provide proof of this, and therefore an audit requires employees to submit documents that substantiate eligibility. An audit will be a significant undertaking.
Consider that you will need to:
- Review health plan documents (and the documents for any other plans for which the audit is being conducted) to determine the definitions for all possible eligible dependents.
- Determine the documentation you will require for substantiating eligibility. For example, in the case of a spouse, this might 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, and develop communications materials accordingly.
- Determine the process by which employees can submit their documentation, and set up a mechanism to receive materials.
- Review submitted documentation to determine whether they meet the requirements for establishing eligibility, and 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 storage and/or disposal of the materials employees have submitted.
- Since the audit will likely generate questions from employees, 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. If you decide to use an outside resource, you’ll likely have a choice of vendors. With more and more employers conducting dependent eligibility audits, an industry specializing in this particular employee benefit plan service has developed.
Other design considerations can impact the workload an audit generates. For example, 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 employees enrolling dependents to submit dependent documentation. If you’re considering homing in on particular dependent groups, data from HRAdvance’s client audit shows the distribution of ineligible dependents to be 43% children under age 19, 29% children over age 19, and 28% spouses. Another consideration that can impact the manageability of the audit is whether to conduct it retrospectively (and try to recover claims that shouldn’t have been paid) or on a forward-looking basis only. Many employers also 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 traditionally have 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 eligible dependent — advance communications to alert employees of the audit, and the reasons for it, are critical to employee cooperation and, ultimately, how successful the audit will be. Use all available media, and stress that removing individuals who are not eligible for coverage will benefit not only the company, but all employees who are paying to have themselves, and family members, covered by the plan.
