oversight

Audit of SHPS, Inc. as Administrator of the Federal Flexible Spending Account Program for Contract years 2004 Through 2007 Louisville, Kentucky

Published by the Office of Personnel Management, Office of Inspector General on 2009-04-08.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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                                                         OFFICE OF THE INSPECTOR GENERAL
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                          UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                          Washington, DC 20415


  Officr; of the
Inspector General




                                       AUDIT REPORT




                        AUDIT OF SUPS, INC. AS ADMINISTRATOR FOR

                   THE FEDERAL FLEXIBLE SPENDING ACCOUNT PROGRAM

                         FOR CONTRACT YEARS 2004 THROUGH 2007

                                 LOUISVILLE, KENTUCKY





                    Report No. 4A-RI-OO-08-015                    Date: April 8, 2009




                                                                     Michael R. Esser
                                                                     Assistant Inspector General
                                                                       for Audits




         www.opm.gov                                                                  w;"'w.usajobs.gov
                          UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                               Washington, DC 20415



   Office of the
Inspector General




                                       EXECUTIVE SUMMARY





                    AUDIT OF SHPS, INC. AS ADMINISTRATOR FOR

               THE FEDERAL FLEXIBLE SPENDING ACCOUNT PROGRAM

                     FOR CONTRACT YEARS 2004 THROUGH 2007

                             LOUISVILLE, KENTUCKY




            Report No. 4A-RI-OO-08-015                                   Date: April 8. 2009


      This report details the results of our audit of the Federal Flexible Spending Account (FSA)
      Program operations at SHPS, Inc. (SHPS), in Louisville, Kentucky. The audit covered claim
      benefit payments, administrative fees and cash management activities for contract years 2005
      through 2007. In addition, we reviewed SHPS's administration of the FSA Risk Reserve account
      from contract year 2004 through the transfer of the funds to the Office of Personnel Management
      (OPM) in October 2007. The audit identified $267,596 in questioned costs. The questioned
      items are summarized below.

                                            CLAIM PAYMENTS

      •     Overpayments Incorrectly Identified as FSA Deficits

            SHPS inconectly reported claim overpayments totaling $] 53,080 as FSA deficits for contract
            years 2005 through 2007.

      •     Overpayment Recoveries Not Returned to the FSA Election Account

            SHPS did not provide sufficient documentation to show that nine recoveries (checks received
            from participants for reimbursement of overpaid claims) totaling $32,273 were returned to
            the FSA Election Account.



          www.opm.goY                                                                        www.usajobs.goY
                                    CASH MANAGEMENT


•   Uncashed Checks Not Returned to the FSA Risk Reserve

    SHPS retained uncashed FSA participant checks, totaling $165,354, which have not been
    returned to the FSA Risk Reserve.

•   Unspecified Forfeitures Not Transferred to the FSA Risk Reserve

    SHPS did not transfer $37,570 in "unspecified forfeitures" rep011ed on SHPS' aPM Program
    Income Statement for contract year 2006 to the FSA Risk Reserve.

•   All FSA Risk Reserve F:und~ ~ot Transferred to OPM

    SHPS did not transfer $32,399 of the FSA Risk Reserve funds to aPM by October 2007, as
    requested by Contract Modification 4.

                                ADMINISTRATIVE FEES

We detennined that the administrative fees charged by SHPS to the Federal agencies for
administering the FSA Program were reasonable and in compliance with the terms of the
Contract.




                                              II
                                      CONTENTS

                                                                                         PAGE


        EXECUTIVE SUMMARY	                                                                   i


  I.    INTRODUCTION AND BACKGROUND	                                                         1


 II.	   OBJECTIVES, SCOPE, AND METHODOLOGY                                                   2


III.	   AUDIT FINDINGS AND RECOMMENDAnONS                                                    6


        A.   CLAIM PAyMENTS	                                                                 6


             1. Overpayments Incorrectly Identified as FSA Deficits	                         6

             2. Overpayment Recoveries Not Returned to the FSA Election Account..            8


        B.   CASH MANAGEMENT	                                                                9


              1. Uncashed Checks Not Retumed to the FSA Risk Reserve                         9

             .2. Unspecified Forfeitures Not TransfelTed to the FSA Risk Reserve            11

              3. All FSA Risk Reserve Funds Not TransfelTed to OPM	                         11


        C.   ADMINISTRATIVE FEES	                                                           13


IV.	    MAJOR CONTRIBUTORS TO THIS REPORT                                                   14


        SCHEDULE A - SUMMARY OF QUESTIONED COSTS


        APPENDIX (SHPS's response, dated January 23, 2009, to the draft audit report)

                     I. INTRODUCTION AND BACKGROUND

 INTRODUCTION

 This report details the findings, conclusions and recommendations resulting from our audit of
 SHPS, Inc. (SHPS), as administrator for the Federal Flexible Spending Account (FSA) Program.
 The audit was perfOlmed by the Office of Personnel Management's (OPM) Office of the
 Inspector General (OIG), as established by the Inspector General Act of 1978, as amended.

 BACKGROUND
  OPM is the executive branch agency with primary responsibility for the Federal Government's
  human resources management policy and structure. As pmi of its basic mission, OPM
  administers the Civil Service Retirement System, Federal Employees Retirement System,
. Federal Employees Health Benefits Program, Federal Employees Group Life Insurance Program,
  and the Long Term Care Program. OPM also exercises a leadership role in the development of
  newbenefit programs for Federal employees.

 At the direction of the President, OPM implemented a Health Insurance Premium Conversion

 Plan, 5 Code of Federal Regulations (CFR) Part 550, in October 2000 for approximately

 1.6 million executive branch employees who participate in the Federal Employees Health
 Benefits Program. Fm1hennore, 5 CFR Part 892 provides policies describing the features and
 operation of the premium conversion plan and the Flexible Spending Account, also referred to as
 reimbursement accounts, which provide tax advantages authorized under the Internal Revenue
 Code and are widely used by both private and public employers in the United States.

 SHPS was contracted by OPM, in March 2003, to administer OPM Contract 0303000009

 (the Contract), pursuant to the Request for Proposals (RFP) issued by OPM for qualified third

 party administrators to administer Health and Dependent Care Spending Accounts on a self­

 supporting basis for active civilian Federal employees.


 Compliance with laws and regulations applicable to the FSA Program is the responsibility of
 SHPS management. Also, management of SHPS is responsible for establishing and maintaining
 a system of internal controls.

 The audit of the FSA Program administered by SHPS was conducted pursuant to the Contract;
 48 CFR Pad 31; and 5 CFR Chapter 1, Part 892.

 Our previous audit of SHPS as Administrator of the FSA Program (Rep0l1 Number 4A-RI-00­
 05-010, dated September 2, 2005) covered contact years 2003 and 2004. This audit covered the
 start up and administrative costs for contract year 2003, and the handling of funds received from
 agencies and payroll offices for contract year 2004. All findings were resolved.




                                                 1

                II. OBJECTIVES, SCOPE, AND METHODOLOGY

OBJECTIVES

The primary purpose of the audit was to detetmine if SHPS administered the FSA Program in
compliance with the Contract (and the applicable contract modifications) and 48 CFR Part 31 of
the Federal Regulations. Specifically, our objectives for 2005 through 2007 were as follows:

Claim Payments

    •	 To detetmine whether SHPS complied with the Contract's provisions relative to benefit
       payments.

Cash Management

    •	 To detennine whether SHPS handled FSA Program funds in accordance with applicable
       laws and regulations, OPM guidance, and the Contract.

Administrative Expenses

    •	 To detennine whether administrative fees were charged in accordance with the terms of
       the Contract and applicable regulations.

    •	 To determine if administrative fees for health care and dependent care, and risk

       assessment fees paid by Government agencies were calculated correctly.


  Additionally, our objectives relating specifically to the FSA Risk Reserve (FSARR) were to
  detennine if SHPS properly accounted for all FSARR deposits (i.e., agency fees, investment
  income, dividends, perfonnance penalties, etc.) and withdrawals from the risk reserve during
. contracfyears 2004 through 2007, and transferred all risk reserve funds on hand to OPM in
  October 2007 in accordance with the Contract.

SCOPE

We conducted this perfoffi1ance audit in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our audit findings and
conclusions based on the audit objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audif.objectives.

The audit covered contract years 2005 through 2007 for our review of claim payments, cash
management, and administrative expenses. Additionally, the audit covered the FSARR for
contract year 2004 through October 2007. Audit field work was completed at SHPS's offices in
Louisville, Kentucky, from April 14,2008 through May 16,2008. Additional work was
accomplished in our Washington, D.C. office.




                                                 2

· In conducting the audit, we relied to varying degrees on computer-generated data provided by
  SHPS. Due to time constraints, we did not verify the reliability ofthe data generated by the
  various information systems involved. However, while utilizing the computer-generated data
  during audit testing, nothing came to our attention to doubt its reliability. We believe that the
  data was sufficient to achieve the audit objectives.

 We obtained an understanding ofSHPS's internal control structure to help detennine the nature,
 timing, and extent of our auditing procedures. This was determined to be the most effective
 approach to select areas of audit. For those areas selected, we primarily relied on substantive
 tests of transactions and not tests of controls. Based on our testing, we did not identify any
 significant matters involving SHPS's internal control structure and its operation. However, since
 our audit would not necessarily disclose all significant matters in the internal control structure,
 we do not express an opinion on SHPS's system of internal controls taken as a whole.

 We also conducted tests to determine whether SHPS had complied with the Contract, the
 applicable procurement regulations (i.e., Federal Acquisition Regulations, and the laws and
 regulations governing the FSA Program). Exceptions noted in the areas reviewed are set forth in
 detail in the "Audit Findings and Recommendations" section of this audit report. With respect to
 the items not tested, nothing came to our attention that caused us to believe that SHPS had not
 complied, in all material respects, with those provisions.

 METHODOLOGY
 SHPS provided MS Excel spreadsheets encompassing summary claim payment detail by FSA
 enrollee for 2006 and 2007. Due to the voluminous nature of this data the Health Care (HC)
 FSA universe for each year was provided in four different spreadsheets (HCl through HC4 for
 purposes of the report). Dependent Care (DC) FSA and Limited Expense Health Care (LEX)
 FSA universes were also provided separately. As a result of these multiple spreadsheets our
 samples were selected judgmentally from each spreadsheet to ensure proper sample coverage.
 The universes for the HC FSA, DC FSA, and LEX FSA for 2006 and 2007 were as follows:

                                                 2006                               2007
 HC FSA Enrollees                              217,476                           223,998
 He FSA Disbursements                        $365,048,482                      $389,441,197

 DC FSA Enrollees                              26,878                             31,398
 DC FSA Disbursements                        $96,398,143                       $107,643,494

 LEX FSA Enrollees                               519                                 939
 LEX FSA Disbursements                         $673,327                          $1,081,392

 To test SHPS's compliance with the Contract's provisions relative to claim payments we
 judgmentally selected 140 FSA enrollees with total disbursements of $377,563 from contract
 years 2006 and 2007. Specifically, we judgmentally selected the 70 highest dollar FSA enrollees
 from each year (15 each from HCI through HC4 and 5 each from DC FSA and LEX FSA) to




                                                   3

detennine if the necessary documents were provided, if the deposits were accurate, and if the
claims were correctly calculated and paid.

 To test SHPS's compliance with the Contract's provisions relative to the accounting of
 forfeitures (forfeitures occur when FSA participants' reimbursed claims are less than their
 payroll deductions) and deficits (deficits occur when FSA participants' claims reimbursed
.exceed their payroll deductions, typically due to attrition), we judgmentally selected and
 reviewed the following:
     •	 120 FSA enrollees with high dollar forfeitures totaling $408,238 (from a universe of
         79,273 FSA enrollees with forfeitures of $47,637,261). Specifically, we selected the top
         10 FSA enrollees from contract years 2006 and 2007 with the highest forfeiture amounts
         from all 4 HC FSA spreadsheets, as well as the DC FSA and LEX FSA spreadsheets (60
         from each year); and
     •	 85 FSA enrollees with deficits totaling $328,638 [from a universe of16,379 FSA
         enrollees with deficits totaling ($6,295,288)]. Specifically, we selected the top 10 FSA
         enrollees with the highest deficit amounts from all HC FSA spreadsheets from contract
         years 2006 and 2007 (40 from each year) and the top 5 FSA enrollees with the highest
         deficit amounts from the 2007 LEX FSA spreadsheet.

To review SHPS's claims overpayment adjudication process, we judgmentally selected:
   •	 40 FSA enrollees with high dollar overpayments totaling $103,344 (from a universe of
       892 FSA Enrollees with overpayments totaling $611,866). Specifically, we selected the
       top 10 HC FSA and DC FSA enrollees ii-om contract years 2006 and 2007 (20 from each
       year) with the highest overpayments with recoveries; and
    •	 20·FSA enrollees with high dollar overpayment recoveries totaling $69,289 (from a
       universe of2,051 overpayment recoveries totaling $683,200). Specifically, we selected
       the top 10 FSA enrollees with the largest overpayment recoveries for 2006 and 2007.

We.reyiewed all FSA uncashed checks using SHPS's uncashed check register from 2004 through
2007-to identify any outstanding participant claim reimbursement checks related to the 2005 and
2006 contract years. The universe consisted of 3,227 uncashed checks totaling $548,987.

To test if SHPS followed its process for the receipt of payroll deductions and if it complied with
the Contract we judgmentally selected a sample of 10 payroll deductions by payroll offices
totaling $43,544,552 (from a universe of $1,346,579,424) from 2005 through 2007. Specifically,
we selected the following:
    •	 The three highest payroll deduction amounts (totaling $6,242,356), by payroll office,
        from the 26th payroll period of2005 (December 12, 2005 through December 31, 2005);
        and
    •	 The three highest payroll deduction amounts (totaling $18,455,145), by payroll office,
        from the 3rd quarter of2006; and
    •	 The four highest payroll deduction amounts (totaling $18,847,051), by payroll office,
        from November 2007.

We judgmentally selected 10 agency invoices (from a tmiverse of714 invoices) issued by SHPS
to determine if the invoice (for administrative and risk reserve fees) reconciled to the billing


                                                 4

SUppOlt, and if the HC FSA counts reconciled to the actual enrollee numbers. Specifically, we
selected the following:  .
    • Three agency invoices from January 2006 and 2007~ and
    • Two agency invoices from October 2006 and 2007.

The samples mentioned above which were selected and reviewed in perfOlming the audit were
not statistically based. Consequently, the results could not be projected to the universe since it is
unlikely that the results are representative of the universe taken as a whole.

We used the Contract and the Federal Acquisition Regulations to detennine allowable, allocable,
and reasonable administrative expenses charged against the Contract.

The results of the audit were provided to SHPS in a draft report, dated November 3,2008, for
review and comment. SHPS's comments on the draft report were considered in preparing the
final report and are included as an Appendix to this report.




                                                  5

              III. AUDIT FINDINGS AND RECOMMENDATIONS

SHPS administered the FSA Program in compliance with the Contract and all other applicable
Federal regulations with the exception of the following m:eas.

A. CLAIM PAYMENTS

   1. Overpayments Incorrectly Identified as FSA Deficits                             Procedural

       We identified 1,319 FSA enrollees who received $153,080 in claim payments in excess
       of their election amounts from 2005 through 2007. These overpayments were incorrectly
       reported by SHPS as FSA deficits.

       A deficit occurs when an FSA participant's total payroll deduction is less than the annual
       election amount (generally due to attrition) and the funds that have been collected are not
       adequate to cover the claims that SHPS has reimbursed to the participant. However, our
       review of the 2005 through 2007 FSA health claims showed instances where SHPS's
       health claim disbursement to the pmticipants exceeded the participants' annual election
       amount. The election amount is the total the FSA participant chooses to have deducted
       from their pay and is the maximum they can be reimbursed if their claims exceed their
       election.

       Our review found that SHPS incorrectly included these overpayments as part of the total
       annual FSA deficits. Overpayments of this type should be reimbursed to the FSA by the
       participant. According to the Contract and SHPS's internal procedures, the participant
       may reimburse SHPS directly (send a check to SHPS) or have the overpaid amount
       applied to the participant's future claims.

      ,SHPS is responsible for taking steps to recover claims overpayments from the
    - participants. In contrast, FSA deficits are netted against the FSA participant payroll
       contributions that are not used by the participants for reimbursement ofhealth claims
       (i.e., forfeitures).

       In the Contract, SHPS stated that if improper processing of claims results in an
       overpayment, the account would be frozen and no further activity would be allowed until
       the overpayment was resolved. SHPS would then send the participant a letter advising
       them of the overpayment and provide the option of reimbursing the overpayment in full
       by personal payment or deducting it from future claims payments. SHPS would make
       two subsequent attempts to contact the employee for reimbursement of the overpayment.

       While on-site the SHPS claims operations department discussed its internal/corporate
       procedures for identifying and recovering claims overpayments with the GIG auditors.
       SHPS's internal procedures were consistent with those in the Contract.




                                                6

By classifying these overpayments as deficits, SHPS did not follow its overpayment
procedures and attempt recovery of the funds. This resulted in the FSARR not receiving
$153,080 that was paid to FSA enrollees in elTor from 2005 through 2007.

SHPS Comments:

SHPS disagrees with the finding and states that it identified a total of $132,282 in
unresolved overpayments for contract years 2005 through 2007 that meet the criteria
questioned by the OIG. SHPS goes on further to state that while the contract does not
provide specific language regarding resolution of outstanding overpayments, it considers
this item to fall under the claims processing quality perfonnance guarantee. The
guarantee requires SHPS to maintain a 97 percent or greater level for claims processing
quality. IfSHPS failed to meet the guarantee it would be assessed a penalty. However,
during this period SHPS maintained a level of99.99 percent.

DIG Comments:

SHPS is incorrect in stating that the Contract does not provide specific language
regarding the resolution of outstanding overpayments. SHPS's responses to the RFP
have been incorporated into the Contract and are now considered to be pal1 of the
Contract by the OPM contracting office. As a result, SHPS's own policies regarding
overpayments are the procedures that must be followed for the Contract.

We agree that claims overpayments questioned are processing errors. However, this type
of overpayment should not be identified as a "deficit" to the FSA. A deficit account
occurs when the participant did not meet his or her annual election amount (through FSA
payroll allotments) but received the total annual election amount through claim
reimbursement payments. An "overpayment" to a participant occurs when SHPS's total
annual claim payments to a participant exceeds the participants' annual election amount.

We believe that although the claims processing error may be below the three percent
error rate allowable per the guarantee, SHPS should take the necessary steps to correct
and recover identifiable en-ors and implement controls to prevent this error from
occurring in the first place.

Recommendation 1

We recommend that the contracting office ensure that SHPS understands its requirements
under the Contract in regards to overpayments and that it follows those requirements in
regards to all future FSA overpayments.

Recommendation 2

We recommend that the contracting office require SHPS to perfonn quarterly reviews of
claims overpayments and to begin any necessary recovery processes.




                                         7
   Recommendation 3

   We recommend that the contracting office modify the Contract to specifically define·
   deficits and overpayments per the OIG comments above. The modifications should also
   address the consequences if the requirements related to overpayments are not followed.

2. Overpayment Recoveries Not Returned to the FSA Election Account                   $32,273

   SHPS did not provide support to show that nine recoveries (checks sent to SHPS by FSA
   participants for reimbursement of claim overpayments), totaling $32,273, were deposited
   into the FSA Election Account.

   We reviewed a judgmental sample of 20 recoveries (10 each from contract years 2006
   and 2007) and found that 9 of the recoveries from 2006 were deposited into SHPS's
   Master FSA Composite Account (Concentration Account) instead of the FSA Election
   Account.

   Based on our review ofSHPS's flowchart of the various FSA accounts, the Concentration
   Account is a holding account used for the receipt ofFSA funds from Federal agency
   payroll offices. The funds are held in the Concentration Account until they are
   transferred to the appropriate FSA account The FSA Election Account is used to hold
   and disburse the funds used for reimbmsement of FSA participant health benefit and
   dependent care claims or invested until needed to pay claims. Therefore claim
   overpayment reimbursements from FSA participants should be deposited into the FSA
   Election Account and not the Concentration Account.

   Our review showed that the nine recoveries identified (totaling $32,273) were deposited
   into the Concentration Account and not transferred to the FSA Election Account.

  .SHPS Comments:

   SHPS agreed with the finding and stated that the recoveries have been transfen-ed to the
   Election Account.

   OIG Comments:

   SHPS did not provide documentation to show that the overpayment recoveries were
   transferred to the FSA Election Account.

   Recommendation 4

   We recommend that the contracting officer ensure that SHPS has retumed the $32,273 to
   the FSA Election Account and provide documentation showing the funds were
   u"ansferred.




                                            8
     Recommendation 5

     We recommend that the contracting officer modify the Contract to require SHPS to
     perform monthly reconciliations of the FSA Concentration Account to ensure that all
     FSA funds are transfelTed to the proper accounts.

B. CASH MANAGEMENT

  1. Uncashed Checks Not Returned to the FSA Risk Reserve                            $165,354

     SHPS did not return funds from uncashed FSA benefit payment checks issued from
     March 2004 through December 2006, totaling $165,354, to the FSARR account.

     This audit issue was also identified in our previous audit of this program; report number
     4A-RI-00-05-010, dated September 2,2005. The OIG recommended that the OPM
     contracting office provide SHPS with procedures for handling uncashed participant
     reimbursement checks. Subsequently, procedures were developed in agreement with the
     OPM contracting office before Modification 3 became effective and were eventually
     incorporated into Modification 3.

     Modification 3, Exhibit A, 2.A. 4) a) iv) of the Contract, regarding reissued checks,
     requires SHPS to reissue checks to FSA participants whose uncashed checks, in an
     amount of at least $25, have become stale. The Contract further states that SHPS must
     send a letter to FSA participants notifying them of the uncashed check and give them a
     specified period to respond, requesting that the check be reissued. Per SHPS internal
     uncashed check procedures, FSA participants have 30 days to respond to SHPS inquiries.

     Additionally, Modification 3, Exhibit A, 5. B. of the Contract, regarding outstanding
     checks, states that in the event that an FSA participant reimbursement check remains
     outstanding 180 days following the end of the close out period, SHPS would then void
     the remaining uncashed checks and deposit the funds into the FSARR accOlmt within 20
     days of the stop payment. Furthelmore, it states that once the funds have been transferred
     to the FSARR account, SHPS shall not reissue any checks and shall not be liable to any
     FSA participant for those amounts. Per our discussions with SHPS, its internal policies
     and procedures state that the forfeited amounts are credited to the appropriate plan year
     on an annual basis.

     Our review showed that SHPS did not review the uncashed checks on a regular basis. As
     a result, we identified 1,435 checks totaling $165,354 that were not credited to the
     FSARR account.

     SHPS Comments:

     SHPS disagreed with the finding and stated that the criterion cited by the 010 in
     Modification 3 was effective January 1,2007 (subsequent to the dates ofthe items in




                                              9

 question). However, it stated that it will work with OPM to develop a process for
 uncashed checks.

 DIG Comments:

 SHPS is conect that the criterion cited in Modification 3 is effective after the dates of the
 FSA reimbursement checks in question. However, as stated above, our previous audit
 identified that SHPS did not have procedures in place to handle 2004 uncashed
 participant reimbursement checks that were identified during the audit. The OIG
 recommended that the OPM contracting office provide SHPS with procedures for
 handling uncashed participant reimbursement checks.

 Subsequently, procedures were developed in agreement with the aPM contracting office
 before Modification 3 became effective. As result, a reconciliation of2004 uncashed
 checks was completed in 2006. While on-site, we were infonned that a review of the
 2005 uncashed checks was completed, however SHPS did not provide supporting
 documentation for this review. Therefore, we could not verify whether the review was
 completed. SHPS should continue its review of uncashed checks for contract years 2005
 through 2007 as was done for contract year 2004.

  Our review of the Modification 3 language regarding uncashed checks raises concerns
  about the length of time before an uncashed FSA reimbursement check can be returned to
  the FSARR account. Per the current language (180 days after the claims run out period),
  an uncashed check would not be eligible to be returned lmtil November of the following
  year. For example, an FSA reimbursement check issued in January 2009 that goes
  uncashed will not be eligible to be transferred to the FSARR account until November
  2010. Waiting this long is completely unnecessary as checks typically have a stale date
  180 days after the issuance of the check and, in our opinion, SHPS should be allowed to
, act on any check after that date.

 Recommendation 6

 We recommend that the contracting officer review and revise the Contract language
 related to uncashed checks to allow SHPS to stop payment after the check reaches its
 stale date, and SHPS should then begin those procedures as outlined in the Contract.

 Recommendation 7

 We recommend that the contracting officer require SHPS to complete its reviews of
 uncashed checks for contract years 2005, 2006 and 2007. Upon completion of the
 uncashed check review, SHPS should provide the contracting office with documentation
 to suppOIi the results of its review and transfer of all uncashed check forfeitures to the
 FSARR account.




                                          10

   Recommendation 8

   We recommend that the contracting officer require SHPS to complete qumierly reviews
   of uncashed checks and provide the contracting office with documentation to support
   completion of its review including the transfer of $165,354 in uncashed check forfeitures
   to the FSARR account.

2. Unspecified Forfeitures Not T.-ansferred to the FSA Risk Reserve                    $37,570

   SHPS did not transfer amounts reported as «unspecified forfeitures" on the SHPS aPM
   Program Income Statement for plan year 2006 to the FSARR account.

   During our audit we reviewed the SHPS aPM Program Income Statement for 2006 and
   identified $37,570 listed as "unspecified forfeitures!' We met with SHPS officials
   regarding this, infonned them of our concerns, and requested additional documentation.
   However, SHPS has been unable to provide any documentation to suppoli the
   "unspecified forfeitures" or what they represent. Through our review of the FSARR
   account, we detennined that the '\mspecified forfeitures" had not been transferred to the
   account as required by the Contract.

   Modification 3, Exhibit A, 5. A. ofthe Contract regarding the return of forfeitures states
   that 180 days following the end of the claims run out peliod SHPS will refund to OPM
   any funds unclaimed by FSA participants.

   SHPS Comments:

   SlIPS disagreed with the finding and stated that it believes that the cash received on the
   statement was overstated because refunds were not taken into consideration.

   OIG Comments:

   SlIPS did not provide any documentation to suppoli that the $37,570 in "unspecified
   forfeitures" should not be returned to the FSARR account.

   Recommendation 9

   We recommend that the contracting officer require SHPS to transfer the $37,570 in
   "unspecified forfeitures" to the FSARR or provide documentation to SUppOlt that the cash
   received was overstated.

3. All FSA Risk Reserve Funds Not Transferred to OPM                                   $32,399

   SlIPS did not transfer $32,399 of the FSARR funds to aPM by October 2007, as

   required by Contract Modification 4.





                                            II
Modification 4 to the Contract states that SHPS is to transfer the full balance of the
FSARR to OPM.

As a result of this modification to the Contract, SHPS transferred the administration of
the FSARR account to OPM in October 2007. SHPS reconciled and closed its FSARR
account and transferred $18,463,807 to OPM on October 15,2007.

To detennine ifthe amount returned by SHPS was correct, we reconciled the FSARR
account from its inception in January 2004 to the transfer to OPM in October 2007. We
detennined the total deposited into the FSARR account by reviewing SHPS accounting,
billing and payment records/schedules, bank and Investment statements, wire transfers,
etc. The FSARR account deposits included Risk Reserve Fee payments from Federal
agencies, forfeitures, earned interest, dividends, and pelformance penalties.

We also identified all withdrawals from the FSARR account from January 2004 through
October 2007. We verified that all of the withdrawals from the FSARR account were
properly authorized by the OPM Contracting Office. We subtracted the total withdrawals
from the total amount deposited in the FSARR accolUlt from 2004 through October 2007.

We compared our reconciled balance of $18,496,206 to the balance SHPS transfened to
OPM, $18,463,807 and determined the OPM is due $32,399.

SHPS Comments:

SHPS disagrees with the finding and states that it isn't clear if market fluctuations were
taken into consideration when determining the amount due to the FSARR account. As a
result, SHPS does not agree that any funds are due to the FSARR account.

OIG Comments:

The GIG reconciliation of the FSARR account did take into account market fluctuations.
Our review traced deposits and withdrawals to the investment accounts fi'om 2004
through 2007. Our reconciliation of the ending balance and beginning balances took into
consideration the market cost per share to detemline the value of the portfolio at each
year through the closing of the investment account. We feel that all losses and gains are
already reflected in our reconciliation. It also concerns us that SHPS would categoricaIJy
state our calculations were incorrect without asking for those calculations at any point
during its review of our draft audit report.

Recommendation 10

We recommend that the contracting office require SHPS to transfer $32,399 to the
FSARR account or provide a reconciliation that SUppOlts that all funds were appropriately
transfelTed to OPM.




                                         12

c.   ADMINISTRATIVE FEES

     We detennined that the administrative fees charged by SHPS to the Federal agencies for
     administering the FSA Program were reasonable and in compliance with the tenus of the
     Contract.




                                               13

             IV. MAJOR CONTRIBUTORS TO THIS REPORT

Special Audits Group

               Auditor-In-Charge

             Auditor


                  SAG Group Chief (202) 606-4745


               Senior Team Leader (202) 606-2170





                                          14

                                                                                                                                             SCHEDULE A
                                                               AUDIT OF SHPS, INC., AS ADMINISTRATOR OF
                                                         THE FEDERAL FLEXIBLE SPENDING ACCOUNT PROGRAM
                                                                         LOUISVILLE, KENTUCKY


                                                                     REPORT NUMBER: 4A-RI-00-08-015

                                                                     SUMMARY OF QUESTIONED COSTS


QUESTIONED COSTS                                                                      2004            2005          2006        2007        Total


A. CLAIM PAYMENTS


  1.   Overpayments Incorrectly Identified as FSA Deficits                                   $0                $0          $0          $0                 $0
  2.   Overpayment Recoveries Not Returned to the FSA Election Account                        0                 0     32,273            0             32,273


  TOTAL CLAIMS BENEFIT PAYMENTS QUESTIONED                                       I           $0   ,            $0    $32,273           $0            $32, 273   1
B. CASH MANAGEMENT


  1.   Uncashed Checks Not Returned to the FSA Risk Reserve                             $1,667               $401   $163,286           $0           $165.354
  2.   Unspecified Forfeitures Not Transferred to the FSA Risk Reserve                        0                 0     37,570           0              37,570
  3.   All FSA Risk Reserve Funds Not Transferred to OPM                                      0                 0           0     32,399              32,399


  TOTAL CASH MANAGEMENT COSTS QUESTIONED                                         I      $1,667
                                                                                                      iiii
                                                                                                             $401   $200,856     $32,399            !235,323I


TOTAL QUESTIONED COSTS                                                           I      $1,667               $401   $233,129     $32,399            $267, 596   1
                                                                                                      APPENDIX





January 23, 2009



U.S. Office of Personnel Management
Office ofthe Inspector General
Attn• • • • •
1900 E Street, NW, Rm. 6400
Washington, DC 20415-1100

RE: Report No. 4A-RI-00-08-015

Dear_

SHPS is pleased to provide you with our response to the recommendations thai were presented as a
result of the recent audit of the FSAFEDS program by the Office of the Inspector General (OIG). For
your convenience, we have provided a separate response for each item outlined in the OIG:s report.

If you have any questions after reviewing our feedback, please do not hesitate to contact us for
clarification.



Sincerely,




 Ice Presl ent 0 Inance
SHPS Human Resource Solutions, Inc.
9200 Shelbyville Road, 2nd Floor
Louisville, KY 40222
A. Health Benefit Claim Payments
Recommendation 1: Overpayments Incorrectly Identified as FSA Deficits
The OIG recommends that the contracting officer require SHPS to return $154,895 to GPM to be credited
to the FSA Risk Reserve.


SHPS Response:

The GIG identified $49,591.00 in overpayments for the 2005 plan year that did not appear to be resolved.

SHPS was able to reconcile to this amount but disputes $2,411.02. This total represents election

increases made by participants as a result of approved election changes. The forfeiture report used

during the review does not include election changes made during the year.



The GIG identified $84,892.00 in overpayments for the 2006 plan year that did not appear to be resolved.

SHPS is unable to reconcile to this amount. SHPS review of the report identified a total of $79,460.42 for

a variance of $10,501.58. Of the total amount SHPS identified, $8,390.74 is not applicable because that

amount represents election increases made by participants asa result of approved election changes. The

forfeiture report used during the review does not include election changes made during the year.


The OIG identified $20,412.00 in overpayments for the 2007 plan year that did not appear to be resolved.

SHPS is unable to reconcile to this amount. SHPS review of the report identified $24,986.27 for a

variance of $4,574.37. Of the total amount SHPS idenlified, $10,954.26 is not applicable because that

amount represents election increases made by participants as a result of approved ejection changes. The

forfeiture report used during the review does not include ejection changes made during the year.



In summary, the OIG found a totar $154,895 in unresolved overpayments. SHPS identified a total of

$153,897.69, for a difference of only $857 31 across all plan years. Gfthat total, $132,281.67 was

determined to be a result of unresolved overpayments that exists for plan years 2005, 2006 and 2007.

However, SHPS does not agree that financial restitution is required. While the contract does not provide

specific language regarding resolution of outstanding overpayments, SHPS considers this item to fall

under the claims processing quality performance guarantee. That guarantee requires SHPS to maintain

a 97% or greater level for claims processing quality. If SHPS fails to meet the 97% quality mark, a 2%

penalty payment will be assessed based upon the estimated revenue for the effective quarter.



SHPS calculated the processing claims quality for overpayments utilizing the service level agreement

logic outlined in the contract. The calculation details are below.

                                                                   SHPS            %of
                        Plan Year          Disbursements
                                                                Overpayment        Error
                            2007           $533,593,44040        $14,032.10       0.003%
                            2006           $460,372,357.24       $71,069.68       0.015%
                            2005           $352,505,471.08       $47,179.98       0.013%
                           Overall        $1,346,471,26872       $132,28176       0.010%


The calculation shows the percentage of error is well below 1% so the overpayments identified are well
within the required performance standard for claims quality, and as a result, restitution is not required.
Recommendation 2: Overpayment Recoveries Not Returned to the FSA Election Account
The OIG recommends that the contracting officer require SHPS to transfer and confirm the transfer of
$32,273 10 the FSA Election Account

SHPS Response:
SHPS agrees overpayment recoveries that should have been deposited into the 'election' account were
deposited, in error, into the 'concentration' account. This error was subsequently identified during the
monthly reconciliation process and transferred to the correct account SHPS can identify all of the
deposits that were initially deposited into the incorrect account prior to the reconciliation.

In addition, all OPM bank accounts bperated by SHPS are interest bearing so neither the election or
concentration accounts experienced a loss of interest income. Regardless of the purpose of the account
or the duration of the deposit, SHPS will always maximize the" interest earnings.

Base upon these findings, SHPS does not agree that any financial restitution is warranted. There is no
financial impact to the government, thus no correction is needed.




                                   DELETED BY OPM-OIG


                         NOT RELEVANT TO FINAL REPORT

                                    DELETED BY OPM-OIG

                           NOT RELEVANT TO FfNAL REPORT


 Recommendation 5 - 6: Un-cashed checks >1 Year Not Returned to the FSA Risk Reserve
 The alG recommends that the contracting officer require SHPS to return $165,354 to the aPM FSA risk
 reserve account for forfeited un-cashed benefit payment checks.

 The DIG also recommends that the contracting officer ensures that SHPS performs an annual
 reconciliation of un-cashed checks to identify and return un-cashed forfeited checks over one year old to
 the OPM FSA Risk Reserve. Upon completion of the annual un-cashed check reconciliation, provide the
 contracting office with documentation to support completion of reconciliation and transfer of un-cashed
 check forfeitures to aPM Risk Reserve Account.

 SHPS Response:
 SHPS confirmed that the GIG's findings reference Modification 3 of the contract. Modification 3 was
 effective 1/1/2007, but your findings are relative to un-cashed checks from March 2004 through
 December 2006. SHPS agrees to cooperate with aPM to develop, or re-instate, the previous un-cashed
 check process to reach resolution on this item.



 Recommendation 7: Forfeitures Not Transferred

 The GIG recommends that the contracting officer require SHPS to transfer $37,570 in unspecified

 forfeitures to aPM to be credited to the FSA Risk Reserve Account.


  SHPS Response:
  Forfeitures are calculated by taking the difference between the cash received and claims paid. SHPS
  believes the cash received was overstated because refunds were not taken into consideration. Refunds
. must be netted against total deposits. Refunds are necessary due to participallt error, qualifying tife
  event or payroll deduction error. SHPS does not agree that $37.570 needs to be transferred 10 the FSA
  Risk Reserve Account.
Recommendation 8: Risk Reserve Funds Not Transferred
The OIG recommends that the contracting officer require SHPS to transfer $32,399 to the OPM Risk
Reserve.


SHPS Response:
The findings indicate the difference was calculated by simply comparing deposits to withdrawals. It is not
clear to SHPS as to whether market fluctuations were taken into account when determining this amount.
The funds in the FSA Risk Reserve Account were always invested into one or more bond funds. The
balance of those bond funds can only be determined by understanding the share price at the time of the
deposit or withdrawal. As a result, SHPS does not agree that any restitution is warranted. If the OIG can
provide details as to whether or not market fluctuations were considered, SHPS is willing to revisit this
recommendation,



Overall Summary
The OIG recommends a total of $630,395 be deposited into the FSA Risk Reserve Account. Based on
the review of the recommendations and the research details provided, SHPS does not agree that any
transfer of funds is required.