dependent eligibility audits

[Guest georgia]

we are a large self-funded ERISA-exempt health plan. we've read about the results some large employers and government entities have had with full scale dependent eligibility audits. and we have questions.

1) does anyone know what action those employers took when the employee failed to submit the requested documentation of their dependent's eligibility? (essentially ignoring the request as opposed to responding that the dependent cannot be documented.)

2) do employees who enroll ineligible dependents and who don't take advantage of amnesty periods lose the right to continue any and all coverage under the plan when the employer becomes aware?

3) does anyone know what action employers take when the employee terminates employment before the dependent benefits have been fully recouped?

4) how do fully-insured plans react to the discovery of ineligible dependents?

5) are there other legal processes or penalties are imposed?

thanks in advance for your input!!

[Guest ctopher]

we are a large self-funded ERISA-exempt health plan. we've read about the results some large employers and government entities have had with full scale dependent eligibility audits. and we have questions.

1) does anyone know what action those employers took when the employee failed to submit the requested documentation of their dependent's eligibility? (essentially ignoring the request as opposed to responding that the dependent cannot be documented.)

2) do employees who enroll ineligible dependents and who don't take advantage of amnesty periods lose the right to continue any and all coverage under the plan when the employer becomes aware?

3) does anyone know what action employers take when the employee terminates employment before the dependent benefits have been fully recouped?

4) how do fully-insured plans react to the discovery of ineligible dependents?

5) are there other legal processes or penalties are imposed?

thanks in advance for your input!!

Georgia,

Here are some answers to your questions based on our experience:

1) Dependent is dropped from coverage. You want to make sure it is well documented that you made multiple attempts to obtain verification documentation to prevent the subscriber from saying they did not know they needed to provide anything. Once you have that in place, failing to provide the requested documentation should cause the dependent to be dropped from coverage.

2) This is up to the plan to decide. There have been cases where plans have dropped all family members enrolled if a single member was determined to be ineligible. I suggest caution on this approach, as it can create some significant employee backlash.

3) Actually a fairly small percentage of employers try to recoup lost dollars. I do know of one major airline who attempted to recover 2 years worth of paid claims on each ineligible dependent. Their solution was to have to subscriber either pay the money back in full, or adopt a loan note for the amount. I do not know what their success rate was on this.

4) Most fully insured plans have statements in their plan documents on how they will respond if they identify an ineligible dependent. It typically involves some kind of claim dollar recovery. You do need to make sure that you notify the fully insured carrier as soon as you discover the fact that the dependent is ineligible to prevent liability. Same goes for stoploss carriers as well.

5) There isn't much case law around these kinds of audits yet, but there are a couple of things to keep in mind. The more communication, the better in a project like this. Company newsletter announcements, mulitple letters, and even an outbound call center can help cover your bases and keep you from clear of "I didn't know" participant issues. The other thing to keep in mind is that you must be very consistent in performing the audit. Making an exception to the rules for on family and not for another can get you into very big trouble. I would not have the determination performed at each regional office, rather at a central location that is separated from the participants.

I would be happy to answer any other questions you may have.

[Guest Stepper]

Revenue Ruling 2006-36 discusses the rule in sec. 1.61-21(a)(3) that benefits paid to a nonspouse are includable as income to the employee. To the extent that the Plan does not sue for recovery of the benefits, should the employee receive a 1099 for the value of the ex-spouse's benefits? Also, can the Plan sue ex-spouses under an unjust enrichment theory?

[Guest b2kates]

I believe that RevRul 2006-36 would result in the amount being included on a W-2. That has the additional impact of increasing the withholding obligation.

[Guest Stepper]

I believe that RevRul 2006-36 would result in the amount being included on a W-2. That has the additional impact of increasing the withholding obligation.

Right. The issue is reporting the income from all the prior years for which the employee failed to report the divorce of a spouse. Rather than purchase replacement coverage, the employee got the benefit of the low cost the participation in the plan. Still, we would like to make the ex-spouse responsible for being unjustly enriched from the receipt of benefits.