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Employee Benefits Alert Issue No. 21 Legal & Research Group September 2004 Benefits Brokerage & Consulting Services Rx Purchasing Coalition HR Consulting Data Analysis Benefits Administration Retirement Services Predictive Modeling Call Center Services Voluntary Benefits Consumer Driven Healthcare Legislative & Compliance International Benefits As the cost of health coverage increases, employers are encountering more situations like those described in the boxes on the right. Some employers believe that these situations amount to criminal fraud. Other employers regard them as nothing more serious than administrative nuisances. As the cost of health care coverage increases, more employers are taking these situations very seriously. Anecdotal evidence suggests that as many as 25% of the dependents enrolled on an employer s health plan may be ineligible, so auditing for and removing ineligible dependents can have a significant cost impact. In addition, employers that are subject to ERISA are obligated to administer their plan according to its terms, including its eligibility provisions. ^=åéï=éãéäçóéé=åçãéäéíéë=~å=éåêçääãéåí=ñçêã=êéèìéëíáåö=åçîéê~öé=ñçê=üéêëéäñ=~åç= ÜÉê=ÜìëÄ~åÇK==qÜÉó=~êÉ=Çìäó=ÉåêçääÉÇ=áå=íÜÉ=éä~å=~åÇ=éêÉJí~ñ=é~óãÉåíë=Ñçê=íÜÉ= ÅçîÉê~ÖÉ=~êÉ=í~âÉå=Ñêçã=íÜÉ=ÉãéäçóÉÉÛë=é~óK==^=óÉ~ê=ä~íÉêI=ëÜÉ=~ëâë=íç=Çêçé=ÜÉê= ÜìëÄ~åÇ=Ñêçã=íÜÉ=ÅçîÉê~ÖÉK==qÜÉ=eo=êÉéêÉëÉåí~íáîÉ=Éñéä~áåë=íÜ~í=íÜÉ=ÉãéäçóÉÉ= Å~ååçí=Çêçé=ÜÉê=ÜìëÄ~åÇÛë=ÅçîÉê~ÖÉ=áå=íÜÉ=ãáÇÇäÉ=çÑ=íÜÉ=óÉ~ê=ìåäÉëë=íÜÉêÉ=Ü~ë=ÄÉÉå= ~=ÇáîçêÅÉK==qÜÉ=ÉãéäçóÉÉ=Éñéä~áåë=íÜ~í=ëÜÉ=ëÜçìäÇ=ÄÉ=~ÄäÉ=íç=Çêçé=Üáã=ÄÉÅ~ìëÉ=íÜÉó= ïéêé=çåäó= Åçããçå=ä~ïÒ=ã~êêáÉÇ=~åÇ=íÜÉó=~êÉ=åç=äçåÖÉê=íçÖÉíÜÉêK==cìêíÜÉê= èìéëíáçåáåö=ã~âéë=åäé~ê=íü~í=ëüé=ï~ë=åéîéê=ã~êêáéç=eåçããçå=ä~ï=çê=çíüéêïáëéf=íç= íüé=áåçáîáçì~ä=ëüé=éåêçääéç=~ë=üéê=ëéçìëé=~åç=íü~í=ëüé=âåéï=üé=ï~ë=åçí=üéê=ëéçìëé= ~í=íüé=íáãé=ëüé=éåêçääéç=üáãk==püé=éñéä~áåë=íü~í=ïüéå=ëüé=éåêçääéç=üáã=íüéó=ïéêé= éê~åíáå~ääóò=ã~êêáéç=~åç=üé=åééçéç=åçîéê~öék= ^å=éãéäçóéé=ü~ë=ü~ç=åçîéê~öé=ìåçéê=íüé=éä~å=ñçê=üáãëéäñ=~åç=üáë=ëéçìëé=ñçê=ëéîéê~ä= óé~êëk==låé=ãçêåáåö=üé=åçíáñáéë=eo=íü~í=üé=ü~ë=êéåéåíäó=ã~êêáéç=~åç=ï~åíë=íç=éåêçää= Üáë=åÉï=ëéçìëÉ=áå=íÜÉ=éä~åK==tÜÉå=èìÉëíáçåÉÇ=~Äçìí=íÜÉ=ëéçìëÉ=ÜÉ=~äêÉ~Çó=Ü~ë=ÅçîJ ÉêÉÇ=ìåÇÉê=íÜÉ=éä~åI=íÜÉ=ÉãéäçóÉÉ=åçíÉë=íÜ~í=íÜÉ=éÉêëçå=ïÜç=áë=~äêÉ~Çó=ÉåêçääÉÇ=áë= Üáë=ÉñJëéçìëÉ=~åÇ=ÜÉ=åçï=ï~åíë=íç=Éåêçää=Üáë=åÉï=ëéçìëÉK==cìêíÜÉê=èìÉëíáçåáåÖ=êÉJ îé~äë=íü~í=íüé=éãéäçóéé=çáîçêåéç=íüé=éñjëéçìëé=íïç=óé~êë=é~êäáéêi=äìí=åéîéê=åçíáñáéç= íüé=éãéäçóéê=çñ=íüé=çáîçêåék==eé=éñéä~áåë=íü~í=üé=ï~ë=çêçéêéç=äó=íüé=çáîçêåé=åçìêí=íç= ÅçåíáåìÉ=íç=éêçîáÇÉ=ãÉÇáÅ~ä=ÅçîÉê~ÖÉ=Ñçê=íÜÉ=ÉñJëéçìëÉ=ëç=ÜÉ=ï~ë=åçí=~ääçïÉÇ=íç= Çêçé=ÜÉê=Ñêçã=íÜÉ=ÉãéäçóÉêÛë=éä~åK= When an employer finds an ineligible dependent, several questions often arise. Can the plan terminate the dependent s coverage retroactively? Should it do so? Can the plan recover claims payments? Should it do so? Should the plan refund premiums? Is the plan required to offer COBRA to the dependent? ^å=éãéäçóééûë=åüáäç=áë=áå=~=ëéêáçìë=~ìíçãçäáäé=~ååáçéåí=~åç=áååìêë=aprmimmm=áå= ãéçáå~ä=éñééåëéë=ñçê=íêé~íãéåí=çñ=üáë=áåàìêáéëk==^ñíéê=é~óáåö=íüé=ñáêëí=anmmimmm=áå= ÄáääëI=íÜÉ=qm^=åçíÉë=íÜ~í=çåÉ=çÑ=íÜÉ=Äáääë=êÉéçêíë=íÜÉ=ÅÜáäÇÛë=~ÖÉ=~ë=OSK==tÜÉå=~ëâÉÇ= ~Äçìí=íÜÉ=ÅÜáäÇÛë=~ÖÉI=íÜÉ=ÉãéäçóÉÉ=ÅçåÑáêãë=íÜ~í=íÜÉ=ÅÜáäÇ=íìêåÉÇ=OSÔíÜÉ=äáãáíáåÖ= ~ÖÉ=Ñçê=ÅçîÉê~ÖÉ=ìåÇÉê=íÜÉ=éä~åÔP=ãçåíÜë=ÄÉÑçêÉ=íÜÉ=~ÅÅáÇÉåí=çÅÅìêêÉÇK==cìêíÜÉê= èìéëíáçåáåö=êéëìäíë=áå=íüé=éãéäçóéé=éñéä~áåáåö=íü~í=üé=ï~ë=~ï~êé=çñ=íüé=éä~åûë=~öé= äáãáí=çå=çéééåçéåíëi=äìí=üé=íüçìöüí=áí=ï~ë=lh=íç=äé~îé=íüé=åüáäç=çå=íüé=éä~å=äéj Å~ìëÉ=åç=çåÉ=Ü~Ç=~ëâÉÇ=Üáã=íç=í~âÉ=íÜÉ=ÅÜáäÇ=çÑÑ=çÑ=íÜÉ=éä~åK= 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? Willis Employee Benefits Alert is produced by Willis Legal & Research Group. The information contained in this publication is not intended to represent legal advice and has been prepared solely for educational purposes. You may wish to consult your attorney regarding issues raised in this publication. Willis publications appear on the internet at: www.focusonbenefits.com Copyright 2004

Page 2 The answers to these questions are not always clear, and will vary depending on plan terms, the employer s past practices and other factors. The employer s answers to these questions can result in significant liability under COBRA, ERISA and other authorities, however, so employers have tended to tread lightly when addressing these issues. This is particularly true when a dependent s ineligibility is discovered long after the fact or after the ineligible dependent has incurred significant expenses. This Alert explains what documentation and procedures employers should put in place so that they can avoid these situations to the extent possible and, if they do arise, respond to them consistently and minimize exposure to liability resulting from that response. Explain Eligibility Rules Clearly For the plan to enforce eligibility rules, the rules must be explained clearly in the plan s SPD. Unfortunately, many SPDs generated by carriers and other vendors do not explain eligibility rules clearly. Because the employer is primarily responsible for determining which of its employees are eligible for coverage, the employer should take particular care in reviewing the eligibility provisions in its SPD and revising them to match the employer s actual practice. If the employer does this for an insured plan or a self-insured plan with stop loss coverage, it is important to review the revised provision with the carrier to ensure that it will provide coverage for the individuals described. Employers should also include a statement that the SPD is the exclusive statement of plan eligibility, and that statements by HR representatives and others will not be given effect and should not be relied on in making decisions about coverage. Make the Employee Responsible The next step in addressing these situations is to set a clear plan policy making each employee responsible for knowing the plan s dependent eligibility rules and ensuring that he or she does not enroll or retain ineligible dependents under the employer s plan. To do this, we suggest adopting a statement similar to that in the attachment to this Alert and including it prominently in all plan communications, especially enrollment materials. When introducing this concept to employees, it may be helpful to point out that the employer is acting so that the plan remains as affordable as possible for employees and their eligible dependents. State the Consequences Employers can choose to address these situations in a number of different ways. In the attachment to this Alert, we have included several consequences. Retroactive termination of the ineligible dependent s coverage, with no refund of premium. Denial of COBRA to dependents that were never eligible, and to dependents that were retained in the plan after becoming ineligible if their ineligibility is not reported to the plan on a timely basis. Requirement for the employee to repay any claims the plan paid during the period of ineligibility. Potential for termination of the employee s employment, with denial of COBRA for gross misconduct.

Page 3 One key to minimizing liability risks of whatever consequences the employer chooses to apply is to state the consequences of enrolling or retaining ineligible dependents in writing and frequently. To do this, we suggest adopting a statement similar to that in the attachment, and including it prominently in all plan communications, especially enrollment materials. Follow Through It is tempting when choosing consequences to overstate the sanctions that will be applied in hopes of discouraging employees from violating the rules. In order to minimize exposure to liability, however, employers should draft their materials to reflect only those consequences that it will actually apply when these situations arise. It is particularly important to apply these consequences consistently in similar situations and, if they are not applied, to document how the situation differed from other cases. With a clearly stated eligibility provision, and a provision similar to that in the attachment, an employer who finds an ineligible dependent should be able to proceed as follows. Terminate the ineligible dependent's coverage back to the date of enrollment or the date the dependent became ineligible. If the dependent was ineligible when enrolled, and has not been eligible since, do not offer COBRA when coverage terminates. If such an individual provides a notice of a divorce or dependent ineligibility, respond with a notice that COBRA coverage is unavailable. If the dependent was previously eligible, but the employee failed to remove the dependent when he or she became ineligible, do not offer COBRA unless the employee or the dependent child provides notice of the divorce or loss of qualification as a dependent child within 60 days after the later of the date of that event or the date coverage was lost because of it (e.g., if coverage would continue until the end of the month in which the divorce occurred). If an individual provides untimely notice of one of these events, respond with a notice that COBRA coverage is unavailable. Note that it will not be possible to refuse COBRA due to the lack of notice if the plan does not have reasonable notice procedures as required by recent DOL COBRA notice regulations, or has not disclosed those procedures in both the SPD and the initial notice of COBRA rights. Recover from the employee reimbursement for any claims paid on behalf of the ineligible dependent. If COBRA is available, explain that the employee can avoid the repayment obligation if the ineligible dependent elects and pays for COBRA coverage. Where it appears that the employee acted intentionally (as in the cases noted above), terminate the employee s employment for his or her attempt to defraud the plan and deny the employee COBRA coverage because of the employee s gross misconduct. Although COBRA does not define "gross misconduct" (and we typically recommend that employers err on the side of not asserting gross misconduct), theft, lying, and fraud represent the types of behavior that courts generally have characterized as gross misconduct. In addition, if an employer defines a particular activity as gross misconduct in advance and makes employees aware of that definition, a court is likely to agree with a decision to deny COBRA to an employee who engages in that activity.

Page 4 If an employer chooses to terminate the employee in this way, some other steps also should be taken. The employer should treat the employee as terminated "for cause" for all purposes, including severance and unemployment compensation. The employer should report the employee's fraud to the police and the insurance carrier. Some employers adopting a plan provision like that described in the attachment have first offered an amnesty period, during which employees can drop their ineligible dependents from their coverage with no consequences. They then follow that amnesty period with an audit of eligibility that involves asking employees to provide documentation showing that each of their enrolled dependents is eligible (marriage certificate, birth certificate, transcript, etc.) Almost all employers will need to communicate with employees about COBRA in the next several months due to new COBRA notice rules from the DOL. We believe that will provide an excellent opportunity to implement new procedures for verifying eligibility. Conclusion By taking some modest steps to tighten up plan administration and documentation, many potentially sticky situation (which often involve very sympathetic potential plaintiffs) can be avoided.

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