Most employer group health plans allow eligible employees to enroll their dependents on the plan. Offering dependent coverage is often an important part of the benefit package for employee relations, corporate culture and compliance reasons. But let’s face it – covering dependents is expensive. On many health plans, it’s not uncommon for spouses’ claims to exceed those of the employees.
Given the costs, you would think employers would be concerned about making sure those dollars are being spent on the intended recipients and the dependents enrolled on the plan are eligible. In reality, very few employers check whether the that the individual their employees enroll meets some definition of dependent found in the plan documents. They simply take the employees word for it and enroll whoever the employee lists on the enrollment form.
Some employers assume the insurance company or TPA will let them know if someone is not eligible to enroll on the plan. But most insurance companies and TPAs rely on the employer to verify eligibility and don’t bother checking eligibility either (a child turning age 26 being the common exception). But just because the insurance company or TPA didn’t verify eligibility themselves doesn’t mean they can’t deny claims if they later discover an ineligible dependent on the plan. More often, the employer is just paying premiums and claims for someone who shouldn’t be on the plan.
Now you may ask “Yeah but how likely is it that employees are enrolling ineligible dependents on the plan?” The answer is more than you think. Studies suggest that somewhere between 5-15% of dependents enrolled on a typical health plan are not actually eligible for coverage. Even at the low end of that estimate, if you have 200 dependents enrolled on the plan and you contribute an average of $250 per month per dependent, that’s $30,000 a year that you are paying for coverage for people who shouldn’t be on your plan.
The most common source of ineligible dependents is divorce. When an employee gets divorced, there is often the mistaken assumption that the ex-spouse cannot be removed from the plan when in the vast majority of cases, the ex-spouse can only remain enrolled if they elect COBRA.
With the Affordable Care Act (ACA) adult child mandate allowing children to remain on a parent’s health plan until age 26, it’s less likely than it used to be to find ineligible children on the health plan. But it still happens – employees enrolling nieces/nephews, stepchildren from a previous marriage, or children who have aged out. One surprisingly common phenomenon is parents who grant an employee parental authority over their children through some informal process without the employee ever being formally appointed legal guardian by a court – in most cases, such informal assignment of parental rights does not make those children “dependents” that can be enrolled on the health plan.
A dependent eligibility audit is intended to help employers identify and remove those dependents who don’t qualify for coverage under the health plan (and possibly other benefit plans). The audit may be conducted by the employer or a third-party vendor and can be done midyear or in conjunction with open enrollment.
The first step of the audit typically entails communicating the employer’s intent to audit the plan to the employees, including reminders explaining who qualifies as an eligible dependent under the plan and what documentation the employee will have to produce to verify eligibility, and providing a grace period for employees to remove ineligible dependents from the plan with no consequence.
Once the audit begins, employees will be required to produce documentation to verify the dependents enrolled on the plan are eligible. The precise documents required will depend on the nature of the relationship and how strict the employer wants to be. For example:
Several practical issues need to be addressed with this process. For example, you are obviously dealing with sensitive information and documents so appropriate steps should be taken to safeguard the confidentiality of the information collected. Some states forbid making photo copies of vital records, like marriage licenses and birth certificates, which means employees may have to obtain certified copies of those documents at some expense to themselves to complete the audit – is that your intent? In some cases, employees may be legitimately unable to produce the required documentation (e.g. an employee married in a foreign country where records have been destroyed because of war or civil unrest). You’ll need to consider alternatives and contingency plans for if that occurs.
Once the audit is complete, any ineligible dependents are removed from the plan. This also raises a number of practical issues. For example, will the ineligible dependents be dropped prospectively or retroactively? Retroactive cancellations raise additional legal issues under so-called “no rescission” rules as well as refund issues if the employee was paying premiums for those dependents. Are the ineligible dependents removed from the plan entitled to COBRA? If the dependent in question was never eligible for coverage in the first place then probably not. But if they were eligible at one point and later lost eligibility, they may need to be offered COBRA, depending on the circumstances.
Most employers who conduct a dependent eligibility audit also incorporate some sort of dependent eligibility verification into their enrollment process going forward to avoid ineligible dependents being added to the plan going forward. This ongoing process may be as stringent as the initial audit itself or a more relaxed “audit light” depending on how many problems the audit uncovered and how much additional administrative burden the employer is willing to take on.
Dependent eligibility audits aren’t for everyone. They are often a source of frustration to employees who view it as a nuisance. Employers looking to conduct an audit should have reason to believe the savings realized will outweigh the costs. They should also be prepared with a strong communication plan to explain their reason for the audit and how it will help employees in the long run.
For more information on dependent eligibility audits, contact us.
David works with clients and consultants on a wide range of HR compliance and strategic issues with a particular focus on healthcare reform. He has previously practiced law in private practice and worked in the Minnesota court system.
David works with our clients and consultants on a wide range of HR compliance and strategic issues with a particular focus on healthcare reform. He has previously practiced law in private practice and worked in the Minnesota court system. David has a law degree, magna cum laude, from the University of Minnesota, received his undergrad from Gustavus Adolphus College and is a member of the Society of Human Resources Managers (SHRM).
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