A significant area of opportunity for the internal audit department is the eligibility of employees to receive benefits. Several large companies have conducted eligibility audits, and found that up to 15 percent of employee dependents were ineligible to receive benefits. Since the cost of family benefits can easily exceed $10,000 per year for each employee, this represents a significant opportunity for cost reduction.
One aspect of an eligibility audit is to examine the process by which dependent eligibility is initially approved and subsequently tracked. There should be clearly defined responsibility for these tasks. If no one has been designated for this monitoring role, then there is a strong likelihood of eligibility problems. This process review should extend to the speed with which employee terminations are reported to benefit providers. Further, the audit should examine the process for tracking the recovery of overpayments caused by the late reporting of terminations.
Another type of eligibility audit is to directly review the eligibility documentation for a large sample size of dependents. Documentation can include a copy of a spouse's certified marriage certificate, a copy of a child's certified birth certificate, a court order signed by a judge that proves adoption, the current semester tuition bill that proves a dependent's status as a full-time student, and a signed physician statement that a dependent is mentally or physically handicapped. By analyzing this information in detail, an audit can uncover such ineligibility situations as unmarried partners, divorced spouses, children of live-in partners, and overage dependents that are not disabled or full-time students.
When conducting an eligibility audit, it is extremely useful to operate from a baseline policy that clearly defines dependents and the proof of eligibility that the company requires for them. In addition, the policy should state that the company will collect proof of dependency on an annual basis, in order to locate instances of ineligibility caused by a change in circumstances. If distributed and explained to employees on a regular basis, this policy will enhance their understanding of and cooperation with the audit.
Employees can become annoyed by the level of documentation required by eligibility audits, and may accuse the company of delving too deeply into their personal affairs. The appropriate response is to point out that eliminating ineligible dependents allows the company to continue providing the current level of benefits. Otherwise, given the extremely high cost of benefits, there is a significant risk that the company will be forced to reduce the share of benefits that it pays in subsequent years.
In addition, employees may try to gain waivers from the standard company policy for dependents. The company cannot allow exceptions of any kind, for two reasons. First, it would be allowing coverage that is specifically not allowed under its contracts with benefit suppliers. Also, granting even a single waiver creates a precedent that other employees could use to demand similar treatment.
In short, eligibility audits address an area of significant expense and frequently result in major cost reductions. However, because of their direct impact on employees, the audits must follow a consistently applied and well-documented procedure. Any ineligibility situations should be addressed firmly, but with considerable tact.