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The Honolulu Advertiser
Posted on: Tuesday, April 8, 2008

Firms use tax forms to find ineligible dependents

By Del Jones
USA Today

One last thing to do before sending in your tax return: make a copy for your boss.

Employers are asking workers for a copy of the front page of their 1040 tax form to verify that children and spouses covered by company health benefits are eligible. Employers don't want the entire return, which might reveal sensitive information, and also recommend blacking out financial numbers.

What they do want to know is who is being claimed as a dependent to the IRS because, chances are, those who are not are also ineligible for health benefits. It's the latest wrinkle in dependent eligibility audits, which will be conducted next year by 74 percent of large employers, a survey by Watson Wyatt and the National Business Group on Health found.

Many employers such as Ford Motor give a list of documents that employees can provide, including birth certificates and marriage licenses. The 1040 is an option, but it's not required by Ford. Gannett, parent company of The Honolulu Advertiser and among the latest companies to alert employees of a pending audit, asks for tax returns only to verify stepchildren and children of domestic partners.

But Mark Rucci, senior vice president of Gallagher Benefits Services, says most companies want a tax return as the primary source of information and might question why a couple file separately or choose to investigate whether a 19-year-old is really attending college.

Employers that require documentation say they find that 3 percent to 15 percent of the insured dependents are ineligible. Each insured dependent can cost the employer $2,500 or more each year, which means $1 million or more saved for every 4,000 removed. Employees typically aren't fired or otherwise disciplined.

Peter Ronza, benefits manager for the University of St. Thomas in Minnesota, doubts that companies are finding that many ineligible dependents. He assumes 1 percent or 2 percent of dependents are ineligible, too few to inconvenience all employees with an audit or risk the implications if scanned-in tax documents are opened by curiosity seekers with access.

"It's an invasion," says lawyer and privacy expert Mari Frank, although permitting employees an opportunity to black out information makes it less so. "What will companies want next?"

Watson Wyatt national practice leader Greg Mansur says that audits initially cause resentment, but the savings are too great to ignore. Employers often tiptoe into it. The University of Pennsylvania is letting its employees voluntarily drop ineligible dependents during an amnesty period ahead of an audit that begins on July 1.

Of course, employees can fill out one 1040 for the IRS and a different one for the employer. No system is foolproof, Rucci says, but if discovered, that would be evidence of fraud, not an honest mistake.