Many employer sponsored benefit plans allow employees to enroll their spouses in plan benefits. Unfortunately, marriages sometimes end in divorce, and with the end of the marriage comes the end of benefits eligibility for the now former spouse. However, the plan does not always know when a divorce occurs. What happens then?
Consider this scenario: Zach and Kelly were high school sweethearts who have been married for 15 years. Zach works for Bayside, Inc. and they are both enrolled in Bayside’s medical, dental, and vision plans. They divorce and their divorce was final on August 1, 2018. Under their divorce decree, Zach must provide health coverage for Kelly.
In a perfect world, Zach would notify the plan of the divorce within the time frame prescribed under the plan (generally, 30 or 60 days). Kelly would no longer be eligible for coverage as Zach’s spouse and she would be offered COBRA continuation coverage (or state continuation coverage, if applicable). Since the divorce decree requires Zach to provide Kelly with health coverage, he could pay for her COBRA, pay for an individual policy for her, or reimburse her for her own employer plan.
In a world that is more like ours, Zach does not notify the plan of the divorce and Kelly would continue to be covered as Zach’s “spouse” under the plan, even though they are no longer married. Maybe Zach doesn’t know the plan eligibility rules and assumes the divorce decree gives him the right to continue to cover her. Maybe he’s frazzled from the divorce and simply forgets to notify the plan. Or, maybe he knows the plan rules and knows he should notify the plan, but also knows that doing so will cost him considerably since COBRA costs much more than simply continuing to cover Kelly as his spouse. No matter the intent or motivation, Zach continues to enroll Kelly as his spouse on the Bayside plan.
When an employee doesn’t notify the plan of the divorce, the plan continues to cover a now ineligible former spouse. In a previous piece we pointed out that “some experts estimate that at any given time during the plan year as many as 20 percent of dependents (including spouses) enrolled in an employer's health plan could be ineligible.” Depending on the plan funding and claims incurred, this could potentially cost the employer tremendous amounts, while also creating confusion about how to handle these situations.
Offers of COBRA
Under the applicable law, each covered employee or qualified beneficiary must notify the plan administrator of the divorce. The notice must be provided within 60 days of the divorce (unless the plan provides a longer period, which most do not). Finally, if the plan requires notice of the divorce from the covered employee or qualified beneficiary as condition to providing the COBRA election notice, the election notice may be withheld by the plan administrator.
All of this means that if Zach provides notice to the plan more than 60 days after the divorce, Kelly may forfeit her rights to COBRA. In this regard it’s important that plans clearly communicate that timely notification of the COBRA qualifying event is a condition to receiving the COBRA election notice. This also means that once Zach does notify the plan, Kelly’s coverage should be terminated immediately. While this may sound harsh, plans should keep in mind that the plan cannot provide coverage for an ineligible individual and every additional day Kelly remains covered as an ineligible individual represents more risk to the plan. Additionally, regardless of what the divorce decree says, it cannot overrule the terms of the plan (or compel the plan to provide coverage that the plan does not provide).
Even if Zach (or Kelly, for that matter) notifies the plan within 60 days, there can still be other payment concerns. Specifically, if Zach is required to pay for Kelly’s coverage, he may want to do so on a pre-tax basis. However, he cannot. Since Kelly is not his tax dependent following divorce, any payments he makes can only be made after tax.
If an ineligible individual is enrolled in the plan, that means the plan isn’t being administered according to its written eligibility terms. Any claims of an ineligible individual present risk to the plan and the employer. If the plan is self-insured, these claims could be denied by the stop-loss carrier. Likewise, if the plan is fully-insured, the insurance carrier may well deny the claims. If claims are denied, the plan (and, by extension, the employer) may be solely responsible for payment, without the benefit of otherwise applicable insurance.
Plans that identify ineligible individuals on their plans will want to review claims incurred by the individual after they lost eligibility. Depending on a number of factors, the plan should consider seeking repayment from the individual for these improperly incurred claims. Among other factors, plans should consider: the amount of claims, the compensation of the employee who enrolled the ineligible individual, and the cost and likelihood of collections.
Plans are unlikely to collect when large amounts would be owed by lower paid employees and thus it may not make financial sense to spend additional funds on legal expenses related to collections. Likewise, plans may be able to collect smaller amounts from higher compensated employees without incurring much legal expense. ERISA fiduciary duties require the plan administrator to consider the benefits to all participants and beneficiaries in deciding whether to pursue repayment. However, in some cases (particularly where a plan is funded through a trust), the plan administrator may need to restore any incorrectly paid funds to the plan to rectify a potential breach of fiduciary duty. Plans are encouraged to consult with their own ERISA counsel to determine their best course of action in these situations.
Here are some options plans can consider to protect themselves from these risks:
- Dependent Audits. This is a process whereby a plan reviews dependents and spouses currently enrolled in the plan to ensure they are truly eligible under the terms of the plan. The plan administrator contacts employees and requires them to provide documentation for all spouses and dependents enrolled in the plan, such as a birth certificate or marriage license. Employees who don’t provide proper documentation will have their spouses and dependents dropped from coverage. This is the most comprehensive protection for plans, yet also potentially the most disruptive.
- Documentation for Qualifying Events. Plans can request documentation for any mid-year enrollments due to a qualifying event. For example, an employee who wishes to enroll their new spouse after getting married could be asked to provide a marriage license. This option addresses mid-year enrollees, but doesn’t address those enrolled during open enrollment or currently enrolled on the plan. It also does not address the failure of an employee to communicate an event (such as a divorce).
- Documentation at Open Enrollment. Plans can request documentation for any employees seeking to enroll a spouse or dependent child during open enrollment. This can be done upon initial enrollment, or annually. The one glaring hole with this approach is that unless it is done annually (or at least on a regular basis), it doesn’t provide protections related to those already enrolled in the plan. If it is done annually, it can serve the same function as a dependent audit, but might be somewhat less disruptive.
- Periodic Reminders. Another approach is reminding employees to notify the employer of changes in status. This includes divorce, but also marriages, births, etc. While employees may be told about these at open enrollment, periodic reminders throughout the year can help bring changes to light that might have otherwise gone unreported.
No matter the approach (or combination of approaches), plans must approach these situations consistently so as to avoid potentially singling out certain employees, such as only requiring documentation from some employees but not others.
Additionally, while a dependent eligibility audit or requesting documentation can save some money for the plan by removing ineligible dependents, the savings may be less than expected. However, the benefits may go beyond immediate savings. For example, catching an ineligible dependent before they have a large claim can save money and headaches down the road that are not always immediately apparent. It is also good plan governance.
Employers looking at any of these options should consider the work needed to collect and verify the documentation received and the potential for disruption among their employees. Accordingly, plans may want to carefully wade into this area.
NOTICE OF DISCLAIMER
The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.