The Critical Importance of Employee Benefit Payroll Deduction Audits

Employee benefits are a significant expense but offer crucial coverage for employees and their families. They can be a powerful tool for attracting and retaining top talent but they also come with substantial administrative overhead.

Employee benefits administration involves monthly benefits premium billing of both Section 125 benefits plans and voluntary plans. What are the differences between the two?

Section 125 Employee Benefit Plans:

• Employer-sponsored: These plans are established and maintained by the employer.  
• Pre-tax contributions: Employees can use pre-tax dollars to pay for eligible expenses, such as health insurance premiums, dependent care, and flexible spending account (FSA) contributions, thereby reducing their taxable income.  
• Tax advantages: Both employees and employers benefit from tax savings.  
• Common examples: Health insurance, dental insurance, vision insurance, FSAs, and Health Savings Accounts (HSAs).  

 Voluntary Benefits:

• Employee choice: Employees can choose from a variety of additional benefits offered by the employer.
• Post-tax contributions: Employees pay for the entire premium for these benefits with after-tax dollars.
• No tax advantages: There are no direct payroll tax savings benefits for employees.
• Common examples: Life insurance, disability insurance, critical illness insurance, supplemental health insurance, and pet insurance.

Section 125 plans offer tax advantages for employer-sponsored benefits, while voluntary benefits provide employees with more choice and flexibility in selecting additional coverage. Employers often offer a combination of both to provide a comprehensive benefits package that meets the diverse needs of their workforce.

Billing Issues with Section 125 and Voluntary Plans

From a process perspective, Section 125 plan benefits appear similar to the employee-pay-all voluntary benefits, but there are dramatic differences. For employer-sponsored plans (i.e., medical, dental, and vision), the employer and employee enter into a binding agreement to reduce the employee’s gross pay in exchange for the employer providing the designated benefit(s). While the agreement may stipulate the employee is required to fund some portion of the cost of the specified coverage, the employer is obligated to provide the coverage without regard to the employee’s subsidizing contribution. Whether an employee contribution is collected or not, the employer must fund the Section 125 benefit(s). When employee deductions are missed, the deduction shortage hits the employer’s benefit budget.

Voluntary or worksite benefits are generally employee-pay-all programs. Loading the correct modal deduction amount is important but shouldn’t impact the employer’s budget. That said, we observe countless employers who remit the full invoice amount to the carrier, whether it was taken from the employee’s paycheck or supplemented from company funds.

Whether payroll deductions are for Section 125 or voluntary plans, auditing the data tracking and funding process is necessary and productive.        
                                               

Why Auditing Employee Benefits Payroll Deductions Matters

Despite best intentions, information gets omitted or erroneously added during open enrollment. Not all changes that happened since open enrollment are carried over to the start of the plan year. Finally, changes that happen throughout the year sometimes get missed or not updated within the time allowed by the carriers for retroactive adjustments.

Imagine Sarah, who started working at a new company this year. Regrettably, her 4-year-old was diagnosed with a genetic disorder. During open enrollment, she opted into a medical plan that was single plus child.

Her employer mistakenly charged her for single coverage through monthly payroll deductions. However, the enrollment file was correct and submitted to the carrier, who promptly covered her associated claims for both her and her child. Since there were no service delivery issues, Sarah did not question the amount being withheld from her paycheck.

The difference between the employee contribution for employee plus child and employee only is only $150/month. When the company analyzed its actual benefits budget paid out vs. the planned benefits budget, there was a variance of $1,800. They identified the variance as due to the incorrect payroll deductions withheld and concluded Sarah owed them the shortfall. Given this was the company’s clerical error, should they look to Sarah to pay the difference?

HR leadership generally assumes everything is running smoothly when they begin a new plan year that establishes the payroll deduction amounts to be withheld. The simple example above has numerous variations. This is not only true at the beginning of the plan year but every month for employees who have qualifying life events that allow them to change benefit elections.

Performing reconciliations regularly, we can tell you that all companies experience costly administrative errors. When onboarding a new company, we commonly find that their employee benefits data and payments have deviations and variances.

The nature of dealing with a large responsibility such as employee benefits and the complexity of the administration and ecosystem easily lends itself to errors. These errors can affect benefits service delivery to employees and the company’s budget.

The paramount importance of performing regular payroll deduction audits includes:

1. Ensuring Accuracy
   

• Correct Deductions: Finding incorrect deductions in a timely manner leads to better employee understanding and builds trust between employees and their employers. The amount of the adjustments is more manageable when addressed sooner rather than later.

2. Protecting HR Directors

• Data Integrity: Reconciliations ensure the integrity of HR data, preventing errors that could lead to inaccurate reporting and decision-making.

3. Supporting CFOs
   

• Financial Accuracy: Accurate reconciliations contribute to staying on budget. For example, if an employee is terminated and is not removed from enrollment in a timely manner, the company will be held financially responsible for paying 100% of the benefits premiums for Section 125 plans.    
• Risk Mitigation: By identifying and addressing discrepancies, reconciliations help mitigate financial risks associated with incorrect deductions and potential legal issues. We know of one company that, due to an administrative error, the life insurance coverage had not been issued for an employee. No premiums had been deducted. When he passed, the company decided to pay the family the life insurance benefit that the employee had signed up for even though the coverage had never been issued by the insurer and, therefore, the premium had never been paid. The company funded a life insurance payment via the insurer so that the benefit was not taxable to the beneficiary.

4. Enhancing Broker-Client Relationships
   

• Trust and Confidence: Benefits are designed and offered as part of the employee’s compensation package. Regrettably, real life intervenes, and mistakes happen. Correcting mistakes in a timely manner so everyone is in a win-win position strengthens the employer-advisor relationship.
• Problem Solving: Offering groups an effective payroll reconciliation solution helps brokers maintain a positive relationship with their clients.

The Nuts and Bolts of Effective Employee Benefits Payroll Deduction Reconciliation

Reconciling payroll deductions is a multi-step process that must be continually repeated to remain accurate. Here is a general outline of the steps:

1. Gather Necessary Data: Collect the following information:
   • Payroll records (employee names, earnings, deductions)
   • Benefit premium statements from insurance carriers with start and end dates
   • Employer contributions to benefit plans
   • Any applicable government regulations or company policies 
2. Verify Deductions: Compare the modal payroll deductions for each employee with the corresponding enrollment data. Ensure that the amounts are equivalent and that no errors or discrepancies exist
3. Address Discrepancies: If discrepancies are found, investigate the root cause and take corrective action. This may involve contacting the insurance carrier, adjusting payroll data, or reviewing company policies
4. Maintain Documentation: Document the reconciliation process, including any discrepancies, investigations, and corrective actions. This documentation can be valuable for auditing purposes and to track compliance

The level of detail and amount of data needed to complete an accurate audit can be surprising. If this had to be done manually, there would not be enough hours in the day. With technology, however, the process is streamlined, accurate, and requires minimal annual effort. The rewards are great for both the company’s budget and the satisfaction of their employees’ benefits.

An Automated Payroll Reconciliation Solution

By prioritizing the reconciliation of employee benefit payroll deductions, organizations can protect their employees, enhance their financial accuracy, and keep the employee benefits reporting and payment process running smoothly with each billing cycle. This essential process is a strategic investment in the overall well-being of the organization.

At AdminaHealth, our vision is that the administration of benefits is accurate and effortless. We help organizations streamline and automate their payroll reconciliation process using innovative technology. We view payroll reconciliation as part of the trifecta of the monthly reconciliation that needs to happen – we automate the reconciliation of enrollment, vendor invoices, and payroll. Our reconciliation module handles this effortlessly.

Accurate Enrollment Data

Through regular reconciliation audits using the AdminaHealth Billing Suite, payroll deduction data can be synchronized with enrollment. This audited enrollment data is submitted to benefits providers with each billing cycle, circumventing benefits service delivery issues that crop up when enrollment data is not in sync.

Accurate Future Deductions

If missing premium deductions are discovered, the Billing Suite offers new “re-spread” payroll deduction updates.

AdminaHealth customers experience peace of mind that their employee benefits data is in synch with payroll deductions and employees have the correct amounts being deducted from their paychecks.

If you are interested in offering this feature to clients or using it in your workplace, please don’t hesitate to contact us. We would love to give you a demo or answer any questions you may have!