Consider this scenario: Less than a year after enrolling in your group health plan, Bob asks to have his spouse, Betty, dropped from coverage. Your HR specialist explains to Bob that IRS rules preclude dropping coverage mid-year, absent a valid change in status. Bob argues that he and Betty were common-law spouses and that their break-up is similar to a divorce, but the state in which Bob and Betty reside does not recognize common law marriage.
What would you do? Depending on your perspective, you may see this scenario as an administrative annoyance or a clear representation of fraud. As the cost of health coverage continues to increase, more employers are taking these situations seriously.
Some experts estimate that at any given time during the plan year as many as 20 percent of dependents enrolled in an employer's health plan could be ineligible. This concern has given rise to dependent eligibility audits to help employers determine if they are carrying dependents who are not eligible for coverage.
Any employer - whether subject to ERISA or not - is obligated to administer their plan according to its terms or contract, according to Dennis Fiszer, Chief Compliance Officer for HUB International, Eastern Region. "If you allow exceptions, even unintentionally through failure to monitor, you essentially amend eligibility for other participants, making it difficult or impossible to protect your plan later," he said. "More importantly from a practical standpoint, insurance carriers, including stop loss carriers, will deny coverage to enrollees who are not eligible to participate."
When you identify an ineligible dependent, here are the questions you will likely ask:
- Can the plan terminate the dependent's coverage retroactively? Should it do so?
- Is the plan required to offer COBRA to the dependent?
- Can the employer terminate the employee who enrolled or failed to remove the ineligible dependent?
- If the employee is terminated, is the plan required to offer COBRA to the employee?
Answers to these questions will vary depending on your plan terms, your past practices and other factors. Fiszer recommends that you review the situation with your legal advisors in advance of any individual eligibility re-determinations.
What about health care reform?
Health care reform established new rules for rescissions of group health plan coverage. Plan sponsors are now prohibited from terminating coverage retroactively for individuals who are covered under the plan - except in cases where the individual has engaged in fraud or made an intentional misrepresentation of material fact. This rule went into effect as of plan years beginning on or after September 23, 2010 (for example, January 1, 2011 for calendar-year plans).
The rules provide an important exception: employers can terminate coverage retroactively if it is due to an individual's failure to pay required premiums or contributions toward the cost of coverage on a timely basis.
Where do the employee's actions fall in the spectrum of a lie/fraud or a simple mistake? "The regulations make it clear that misstatements of fact that are "inadvertent" will not give rise to a valid rescission," Fiszer said. "If an employer conducts an eligibility audit and finds ineligible dependents enrolled in the plan, the plan generally may cancel coverage for such dependents prospectively, but not retroactively."
In order to cancel coverage retroactively, however, the plan must actually prove fraud or intentional misrepresentation of a material fact. "Most employers are not going to be able to satisfy that tough standard unless there are special circumstances," Fiszer said. For example, an employee submits a forged marriage license in an attempt to enroll a 'spouse.' "Given the difficulty in satisfying the rescission rule requirements, most employers find it helpful to adopt a policy that only drops individuals prospectively when identified as ineligible under an audit process," he said.
What about the 30-day notice rule?
Consider the effect of the new 30-day notice rule on two situations:
- If the plan sponsor is terminating coverage retroactively because of fraud or intentional misrepresentation, it must provide 30 days' advance written notice to each affected participant.
- If coverage is being terminated prospectively or if the coverage termination is due to non-payment of premiums, advance notice is not required.
For a plan to enforce its eligibility rules, such rules must be precisely detailed in the Summary Plan Description. "Unfortunately, many SPDs only ambiguously address eligibility, especially those issued by insurance carriers," Fiszer said. "Federal ERISA law makes the employer or plan sponsor primarily responsible for determining which of its employees are eligible for coverage. The employer should take that obligation seriously by carefully reviewing the eligibility provisions in its SPD and making any necessary revisions to exactly match it to the employer's actual practice."
In addition, regardless of whether the employer has a fully-insured or a self-insured plan with stop loss coverage -- it is critically important to review the revised provision with the carrier to ensure that it will provide coverage as described. It's also smart to include SPD and enrollment material language advising that only official plan documents are to be considered in determining health coverage eligibility.
Put the issue in the employee's court
Employees should understand that they are responsible for knowing the plan's dependent eligibility rules and ensuring that ineligible individuals are not enrolled in the plan. When emphasizing this concept to employees, it may be helpful to point out that the plan must have rules to operate efficiently and affordably as possible for everyone.
A key to minimizing plan sponsor liability is advance notice. The employer should carefully explain the result of enrolling or retaining ineligible dependents. Plan sponsors often do this by including an explanatory statement describing its "ineligible enrollment" policy and prominently including it in all plan materials and communications.
Although auditing and removing ineligible dependents sometimes produces a beneficial cost impact, employers should maintain realistic expectations about cost saving through dependent eligibility auditing. Shedding ineligible persons does not always result in removing participants generating the most expensive plan usage.
If you are interested in pursuing an eligibility audit, talk to your HUB benefits advisor. Our advisors are experienced in performing compliant, effective and money-saving eligibility audits. Meanwhile, employers should know that they can avoid a variety of problems by taking a few simple steps to improve communication and tighten plan administration.