The proliferation of benefits administration systems has changed the landscape of employee benefits, enabling employers to offer more benefits to employees with significant efficiency gains in enrollment, billing, and communicating eligibility to insurance companies and claims payors. Technology has significantly reduced human error with paper forms and keying in incorrect data. However, benefits administration systems have their own challenges and require correct building/programming of plan rules to ensure accurate enrollments. There is one way to get it right and many ways for systems to be wrong.
The benefit plan feature with the greatest opportunity for incorrect administration is Voluntary Life Evidence of Insurability rules (EOI). These are the rules specifying when employees can elect Life insurance without requiring medical underwriting and how much benefit they can obtain. Not all benefits administration systems can manage the complexity of these rules (age, timing, and income rules all at the same time) or can manage the rules completely without regular human intervention.
If the system does correctly limit election amounts or the human intervention step to approve or pend elections does not happen, the full election will show as active, and the corresponding payroll deduction will be taken from the employee’s paycheck. However, in the event of a claim, the insurance company is only responsible to pay the benefit amount the employee qualified for under the written rules of the policy.
There have been numerous lawsuits over the past few years on this exact situation. The rulings vary by district court as to IF anyone is liable to pay the claim (usually, yes someone is) and WHO is liable – the employer, the insurance company, or both. Is only the employer liable as their system did not manage the rules correctly? Does the insurance company infer liability as they passed the responsibility of eligibility management back to the employer but collected premiums without eligibility verification? You may wonder why the technology vendor providing the benefits administration system is not mentioned. Read your vendor contract.
Regardless, the situation is a bit of a mess to the extent that Prudential recently entered into an agreement with the DOL stipulating how they would manage these claims situations without going to court. The short answer to that agreement is Prudential will pay the claim, but the employer will compensate Prudential, and everyone will make sure the plan rules are correct in the employer’s benefits administration system.
No, we do not expect every insurance company to enter into an agreement with the DOL, but they are all watching the courts and DOL very carefully. Depending on the circumstances, some insurance companies are still in the deny first phase of strategy. Others will pay the claim with documentation of what happened and confirmation of system audit and correction – sometimes requiring a financial agreement with the employer. Other companies have stated they will agree to pay the first claim error of an employer’s plan with written agreement confirmation the employer system rules have been corrected, and further incorrect enrollment claims will not be paid.
The purpose of this article is not to scare anyone away from benefits administration systems or from offering Voluntary Life or other voluntary plans. The advantages of technology and the evolution in the value of voluntary plans far outweigh the negatives. The purpose is to make you aware and provide tips to help avoid evidence of insurability (EOI) claims challenges.
Confirm the Evidence of Insurability rules of every plan, every year. Contact your insurance companies and ask them to confirm the rules of your plans for the year.
Confirm the system rules are correct for annual enrollment and ongoing enrollments, every year. Some tech vendors may try to take shortcuts in programming rules for “full open enrollment” and not take steps to verify transition to ongoing enrollment rules or they may not understand the difference between a “one time” open enrollment offer vs the ongoing plan rules.
Test EOI rules in your system with actual employee scenarios before beginning annual enrollment. Specifically, test situations of employees increasing elections or adding coverage for the first time as a late entrant. Trust, but verify.
Confirm the benefit deduction data flowing to payroll is based on approved elections and not pended elections. It is critical the payroll deduction matches the approved amount based on plan rules. If an employee completes EOI and is approved for additional benefits, the benefits and deduction amount will start at a future date communicated by the insurance company, retro deductions will not be required.
Review what you are communicating to employees at new hire or annual enrollment and be sure your materials include disclaimers regarding eligibility. If necessary, seek guidance from the insurance company on appropriate disclaimers.