Dependent Audit - Are the People on your Health Plan Actually Eligible?

This video provides an in-depth exploration of dependent eligibility audits, a critical cost containment and fiduciary responsibility mechanism for self-funded employers. The discussion, featuring Keith Bird of AmWINS Group Benefits, defines the audit as a process to verify that dependents enrolled on an employer-sponsored health plan are genuinely eligible according to the Summary Plan Description (SPD). The central motivation for conducting these audits is financial, driven by the realization that an estimated 3% to 6% of dependents on average are ineligible, often due to misunderstandings, status changes (like divorce), or intentional fraud. This leakage represents a significant and unnecessary drain on the employer’s healthcare budget.

The conversation heavily emphasizes the financial return on investment (ROI) and the critical risk mitigation aspects of the audit. Statistically, the average savings from removing a single ineligible dependent is estimated conservatively at $4,500, leading to an overall ROI of 8 to 10 times the cost of the audit. Beyond direct cost savings, the most severe risk addressed is the potential voidance of stop-loss insurance coverage. If an ineligible dependent incurs a multi-million dollar claim, the stop-loss carrier will check eligibility, and if the dependent is found to be non-compliant with the SPD, the employer may be liable for the entire claim, underscoring the fiduciary duty under ERISA to maintain plan integrity.

Technologically, the process has evolved significantly from cumbersome paper-based mailings to streamlined digital platforms. Modern audits leverage websites and mobile applications, allowing employees to answer relationship questions and upload necessary documentation (like marriage certificates or tax forms) via their smartphones. This technological shift has dramatically reduced the friction and pushback associated with the audit process, which the speaker notes is surprisingly low (less than 1% of employees typically protest). Furthermore, the audit process serves as a crucial catalyst for improving the plan’s foundational document. Approximately 80% of plan sponsors make adjustments to their SPD language after the audit team reviews the existing rules, tightening up ambiguous language regarding relationships such as common law marriage, domestic partnerships, or foster children, ensuring clarity and defensibility.

Key Takeaways: • Significant Cost Leakage: Employers should anticipate that 3% to 6% of enrolled dependents are ineligible, representing a substantial, unnecessary cost burden on self-funded health plans. • High Financial ROI: The average savings from removing one ineligible dependent is conservatively estimated at $4,500, yielding an expected return on investment (ROI) of 8 to 10 times the audit cost. • Critical Stop-Loss Risk Mitigation: Failure to police dependent eligibility exposes the employer to catastrophic financial risk, as stop-loss carriers will check eligibility and may refuse to reimburse multi-million dollar claims incurred by ineligible individuals. • ERISA Fiduciary Responsibility: Maintaining plan integrity and ensuring only eligible participants receive benefits is a core fiduciary duty under ERISA, making dependent audits a necessary compliance measure, not just a cost-saving exercise. • SPD Language Clarification is Essential: The audit process typically reveals poorly written or ambiguous Summary Plan Description (SPD) language. Approximately 80% of clients modify their SPD after the audit review to clearly define inclusive and exclusive dependent relationships (e.g., foster children, common law spouses). • Technology Drives Adoption: Modern audits utilize technology (websites, mobile apps, photo uploads) to simplify the document submission process for employees, significantly reducing administrative burden and minimizing employee pushback, which is typically less than 1%. • Ongoing Monitoring is Recommended: While a one-time audit provides immediate savings, large organizations with high attrition or frequent status changes benefit from continuous monitoring of new hires, open enrollment changes, and spousal surcharges to maintain plan integrity. • Spousal Carve-Outs and Surcharges: Audits can effectively police spousal carve-out rules (requiring spouses with coverage elsewhere to take it) and surcharge requirements, generating significant revenue or savings (e.g., one client saved $45 million by enforcing a carve-out). • Avoid Internal Audits: Attempting a comprehensive dependent audit internally is highly discouraged, as companies lack the specialized technology and objective third-party distance required, often resulting in a "train wreck" due to complexity and internal friction. • Impact of Healthcare Costs on Behavior: The high cost of healthcare motivates some individuals to intentionally skirt the rules; one example cited was an employee who quickly married their partner after being notified they were ineligible to keep their benefits.

Key Concepts:

• Dependent Eligibility Audit: A formal, third-party review process conducted by self-funded employers to verify that all enrolled dependents (spouses, children, etc.) meet the eligibility criteria defined in the Summary Plan Description (SPD).
• Summary Plan Description (SPD): The legal document that serves as the "bible" for a self-funded plan, detailing all rules, including who is eligible for coverage. Clarity in this document is paramount for audit success and legal defense.
• Stop-Loss Insurance: Coverage purchased by self-funded employers to protect against catastrophic claims. If a claim exceeds the stop-loss deductible, the carrier will verify dependent eligibility before reimbursement, making the audit crucial for risk management.

Examples/Case Studies:

• 30-Year Ineligible Dependent: The first dependent removed in a pilot audit had been on the plan for 30 years under a common law marriage status not covered by the plan, resulting in $256,000 in claims paid that should have been avoided.
• HR Manager Fraud: An HR manager who knew the rules was caught covering her ex-spouse for three years and subsequently lost her job, illustrating the consequences of intentional abuse.
• Shotgun Weddings: Several instances were noted where employees, upon learning their spouse was ineligible and would be removed, quickly submitted marriage certificates dated just days prior to the deadline to retain coverage.
• Hospital Custody Rule Change: A large hospital system had a rule covering children only during years when the employee had custody. After the audit generated a thousand phone calls from affected employees, the rule was immediately changed mid-cycle via a summary modification to prevent mass removals.