Anyone who works with health care benefit plans knows that costs keep going up. They also know they have a responsibility to make sure the plan is sustainable. Add into that the ERISA responsibility to make sure the plan’s terms are followed.
One area of concern is covering ineligible dependents.
Who is an ineligible dependent? At the risk of sounding “obvious,” this would be anyone who is not listed as an eligible dependent. Who is an eligible dependent? This would be any category of dependent listed as covered in the plan. It is important that plans clearly spell out all eligibility definitions and participation criteria in plan documents, summary plan descriptions and enrollment materials.
According to the International Foundation’s forthcoming survey report, Employee Benefits Survey: 2022 Results, the most commonly-covered dependents are children (biological and adopted) and spouses. Certainly, some plans cover other categories such as foster and stepchildren, adult disabled dependents, domestic partners, common-law spouses, and partners in a civil union. Small percentages of plan sponsors cover grandchildren (6%) and nieces or nephews (1%). Therefore, knowing this, who is an ineligible dependent? While it depends on the particular plan, examples of ineligible dependents could be a child over age 26 or a divorced spouse.
Why would an ineligible dependent be listed on the plan? In most instances, this happens by mistake. Plan participants may forget to remove an aged-out child or a divorced spouse. Perhaps a plan includes a spousal carveout. A participant’s spouse gets a job and is offered health coverage through that job. The participant may not even remember about the carveout, and neglects to tell the plan sponsor. In other instances, fraud could be the cause. Even if the participant has the best intentions—their ex-spouse needs health coverage—deliberatively not notifying the plan of the divorce is considered fraud.
How can a plan prevent ineligible dependents from being listed on the plan? Plans should request documentation when a new dependent is added (e.g., birth or marriage certificates) and when a dependent is removed (e.g., divorce decree). Plans should also confirm dependent eligibility at open enrollment time, and can ask for verifying documentation.
Another option is a dependent eligibility audit. According to Employee Benefits Survey: 2022 Results, one-third of health plan sponsors conduct this type of audit.
What is a dependent eligibility audit? The purpose is to verify the relationship between the participant and each of their dependents. This audit can be done internally, or an external auditor can be hired. Typically, a randomized sample of 20% to 25% of participants with dependents is reviewed. Verifying documentation is requested from participants in the sample. The plan sponsor decides what documentation is acceptable for each type of dependent. For spouses, in addition to the marriage certificate, a recent joint document (e.g., tax return or utility bill) may also be requested as proof that the relationship still exists.
Should an audit be communicated in advance, and if yes, how? While an audit can be a surprise, and response to the findings punitive, many employers and plan sponsors give workers advance warning that the audit will occur. It’s helpful to communicate to workers why the audit is being conducted, and what the expected outcomes will be. For example, plan sponsors can explain the legal and financial impact of continuing to cover ineligible dependents. The process should be explained. Benefits staff should be prepared to answer questions from participants.
Often, a plan sponsor will open an “amnesty period” of 30 to 90 days, during which workers with ineligible dependents can come forward to admit those ineligible dependents are covered by the plan. If they come forth voluntarily before the audit begins, there will not be punitive action. A plan sponsor may require the worker to sign an affidavit that they will not knowingly keep an ineligible dependent on the plan; if they do so in future, this could be grounds for termination.
Once the amnesty period ends, the audit occurs.
What happens if ineligible dependents are discovered? If expenses were incurred and paid for the ineligible dependent, the plan sponsor may ask the worker for repayment.
It is prudent to remove ineligible dependents from the plan. While the circumstances surrounding the ineligibility may be one that tugs the heart-strings, and the plan sponsor may be tempted to keep the ineligible dependent on the plan, continuing to cover the ineligible individual sets an ERISA precedent, puts the plan at risk, goes against insurer and stop-loss carrier limits, and could cause taxability of benefits.
Under the Affordable Care Act’s prohibition on recission of coverage, plan sponsors may want to cancel coverage on a prospective basis rather than retroactively, even if the naming of an ineligible dependent was done fraudulently. The health insurer or plan administrator should be notified. Typically, canceling coverage for this reason is not a COBRA qualifying event, unless the original reason for the ineligibility was a qualifying event (e.g., divorce).
Note: Throughout this process, plan sponsors should consult with legal counsel.
The Foundation offers education on health care cost management options, including the in-person Health Care Cost Management course (part of the Certificate Series) and the self-paced e-learning course, Introduction to Group Health Plans.
