By: HUB’s EB Compliance Team
Dependent eligibility audits have become one of the more practical tools available to plan sponsors to ensure that the plan operates in accordance with its own terms, as well as to help in controlling plan expenses. A well-run audit, however, requires more than selecting a vendor and sending notices. Below are some key strategies to run a compliant, effective audit.
Understand the terms of plan documents first
Under ERISA, the plan must follow its written terms — and those terms need to support the action taken during the audit. Before the audit is launched, review the plan document and SPD to confirm that eligibility definitions are clear and consistent, including the terms for who may be an eligible dependent under the plan (e.g., make sure there is a clear definition of “spouse” and “dependent child”). Also, confirm that the plan reserves the right to verify eligibility and remove ineligible individuals. If any of these elements are missing or inconsistent, the employer should consider amending the documents and distributing a Summary of Material Modifications (SMM) to participants, if necessary, before the audit begins.
Design the process — and stick to it
Decide the key structural elements upfront, including the scope of the audit, the participant documentation required, whether an amnesty period will be offered and the consequences for not responding. Once the process is established, apply it consistently to all participants. Granting exceptions invites inconsistency and potential discrimination claims.
Know the ACA's anti-rescission rule
The Affordable Care Act (ACA) generally prohibits retroactive cancellation of coverage. As a practical matter, plan sponsors should instead default to prospective termination for ineligible dependents. Retroactive termination is only permissible in cases of fraud or intentional misrepresentation — and even then, the plan documents must expressly authorize it, and the plan must provide at least 30 days' advance written notice before terminating coverage.
Understand when COBRA does — and doesn't — apply
Multiple types of ineligible “dependents” can be discovered as a result of an audit, including: 1) someone who was never eligible; 2) someone who was eligible at one time, but lost eligibility (e.g., a child dependent who reached the maximum age limit), and then failed to notify the plan administrator as required; and 3) those who actually meet the definition of dependent, but the participant fails to turn in the required documentation. While the first group of individuals generally won’t be eligible for COBRA if coverage is terminated as a result of the audit, the second and third groups may be eligible in certain circumstances. Generally, participants who were never eligible to begin with are not entitled to COBRA following an audit. Plan documents and participant communications should clearly state that termination due to ineligibility during a dependent audit is not a COBRA qualifying event.
Address Section 125 implications in advance
If a participant has been paying pre-tax premiums for a dependent whose coverage is cancelled, a mid-year election change under the Section 125 cafeteria plan may not be available — potentially leaving the participant paying for coverage they no longer have or need. IRS guidance in this area is limited. Consult legal counsel before the audit to determine how the cafeteria plan will address this scenario.
Protect personal information
Establish a clear process for safeguarding confidential information including PII and PHI collected during the audit. The process may include procedures to limit access, to consider how information will be stored and to keep audit documents separate from personnel files. If using a third-party vendor to run the audit, a HIPAA Business Associate Agreement (BAA) must be executed before any participant health information is shared. Note also that HIPAA generally prohibits plan sponsors from taking adverse employment action against participants based on information obtained in their capacity as plan sponsor.
Communicate clearly — and early
Employee communication is one of the most overlooked factors in a successful audit. Brief management staff first on consistent talking points and then notify participants with a clear explanation of the audit timeline, the required documentation, the data protection procedures, the consequences for non-response and the potential impact to COBRA rights. Participants who understand the process are far more likely to engage with it constructively.
Build better processes for the future
After the audit, incorporate documentation requirements into the standard enrollment process to prevent ineligible dependents from enrolling in the first place. Establish a cadence for future audits and update plan documents and the SPD to reflect any new eligibility verification procedures.
Bottom line
A dependent eligibility audit can reinforce plan integrity and deliver savings to plan sponsors — but only when the process is built on a solid foundation of compliance. Confirm plan documents are in order, set a clear timeline, understand the regulatory guardrails and communicate clearly with participants before the first notice goes out. Also consider engaging legal counsel for definitive guidance and support.
If you have any questions, please contact your HUB advisor. View more compliance articles in our Compliance Directory.
NOTICE OF DISCLAIMER
Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect, and Hub International does not have an obligation to update this information. You should consult an attorney, accountant or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.