oversight

Audit of the Federal Flexible Spending Account Program as Administered by SHPS, Inc. for 2008 through 2010

Published by the Office of Personnel Management, Office of Inspector General on 2012-08-22.

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

                                                     U.S. OFFICE OF PERSONNEL MANAGEMENT
                                                           OFFICE OF THE INSPECTOR GENERAL
                                                                            OFFICE OF AUDITS




Final Audit Report
Subject:


                 AUDIT OF THE FEDERAL FLEXIBLE
                  SPENDING ACCOUNT PROGRAM
                  AS ADMINISTERED BY SHPS, INC.
                      FOR 2008 THROUGH 2010



                                           Report No. 4A-RI-00-11-060


                                             Date:




                                                            --CAUTION--
This audit report has been distributed to Federal officials who are responsible for the administration of the audited program. This audit
report may contain proprietary data which is protected by Federal law (18 U.S.C. 1905). Therefore, while this audit report is available
under the Freedom of Information Act and made available to the public on the OIG webpage, caution needs to be exercised before
releasing the report to the general public as it may contain proprietary information that was redacted from the publicly distributed copy.
                                                     AUDIT REPORT

                                AUDIT OF THE FEDERAL FLEXIBLE
                                 SPENDING ACCOUNT PROGRAM
                                 AS ADMINISTERED BY SHPS, INC.
                                     FOR 2008 THROUGH 2010


          Report No. 4A-RI-00-11-060                                                     Date:




                                                                                     ____________________________
                                                                                     Michael R. Esser
                                                                                     Assistant Inspector General
                                                                                       for Audits




                                                            --CAUTION--
This audit report has been distributed to Federal officials who are responsible for the administration of the audited program. This audit
report may contain proprietary data which is protected by Federal law (18 U.S.C. 1905). Therefore, while this audit report is available
under the Freedom of Information Act and made available to the public on the OIG webpage, caution needs to be exercised before
releasing the report to the general public as it may contain proprietary information that was redacted from the publicly distributed copy.
                               EXECUTIVE SUMMARY



                      AUDIT OF THE FEDERAL FLEXIBLE
                       SPENDING ACCOUNT PROGRAM
                       AS ADMINISTERED BY SHPS, INC.
                           FOR 2008 THROUGH 2010


       Report No. 4A-RI-00-11-060                            Date:

The enclosed audit report details the results of our audit of the Federal Flexible Spending
Account (FSAFEDS) Program as administered by SHPS, Inc. The primary objective of our audit
was to determine if SHPS complied with the regulations and requirements contained within
Contract OPM030300009 for program years 2008 through 2010. The audit was performed at the
SHPS office in Louisville, Kentucky, from October 3 through October 14, 2011.

This report identified two findings and questions $1,307,040 for investment income that was not
returned to the FSAFEDS Program. Additionally, the audit calculated $163,206 in lost
investment income on the audit findings. The results of our audit have been summarized below.

        HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT

•   Temporary Employees with Criminal Convictions                                   Procedural

    Five temporary employees with prior criminal convictions were improperly placed at SHPS
    to assist with the 2010 FSAFEDS open season.

                           CASH MANAGEMENT ACTIVITIES

•   Investment Income not Credited to the FSAFEDS Program                           $1,307,040

    SHPS did not credit $1,307,040 of investment income earned on FSAFEDS funds to the
    Program.


                                               i
                                    FRAUD AND ABUSE

The results of our review showed that SHPS had policies and procedures in place to help prevent
and detect fraudulent activity.

                               CLAIM BENEFIT PAYMENTS

The results of our review showed that SHPS had proper controls in place to ensure that claims
were paid in accordance with the contract.

                               RISK RESERVE TRANSFERS

The results of our review showed that SHPS followed the contract requirements for requesting
and returning borrowed funds to the Risk Reserve account.

                                      SUBCONTRACTS

The results of our review showed that SHPS complied with OPM’s contract provisions when
awarding subcontracts.

                               LOST INVESTMENT INCOME

As a result of the audit findings presented in this report, the FSAFEDS Program is due lost
investment income of $163,206.




                                                ii
                                                  CONTENTS
                                                                                                                     PAGE

       EXECUTIVE SUMMARY ..............................................................................................i

  I.   INTRODUCTION AND BACKGROUND .................................................................... 1

 II.   OBJECTIVES, SCOPE, AND METHODOLOGY ......................................................... 2

III.   AUDIT FINDINGS AND RECOMMENDATIONS ...................................................... 8

         A.     HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT ... 8

                1. Temporary Employees with Criminal Convictions ....................................... 8

         B.     CASH MANAGEMENT ACTIVITIES .............................................................. 9

                1. Investment Income not Credited to the FSAFEDS Program ......................... 9

         C.     FRAUD AND ABUSE ....................................................................................... 11

         D.     CLAIM BENEFIT PAYMENTS ........................................................................ 11

         E.     RISK RESERVE TRANSFERS ......................................................................... 12

         F.     SUBCONTRACTS ............................................................................................. 12

         G.     LOST INVESTMENT INCOME ....................................................................... 12

IV.      MAJOR CONTRIBUTORS TO THIS REPORT ........................................................ 13

         SCHEDULE A – SUMMARY OF CONTRACT CHARGES
         SCHEDULE B – SUMMARY OF QUESTIONED COSTS
         SCHEDULE C – LOST INVESTMENT INCOME CALCULATION

         APPENDIX A (SHPS response to the draft report, dated June 1, 2012)
         APPENDIX B (SHPS response to the draft report, dated June 8, 2012)
                    I. INTRODUCTION AND BACKGROUND
INTRODUCTION

This report details the results of our audit of the Federal Flexible Spending Account (FSAFEDS)
Program as administered by SHPS, Inc. The audit was performed 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. The audit fieldwork took place at the SHPS office in
Louisville, Kentucky, from October 3 through October 14, 2011. Additional audit work was
completed in our Washington D.C. and Cranberry Township, Pennsylvania offices.

BACKGROUND

At the direction of the President, OPM implemented a health insurance premium conversion plan
in October 2000 for approximately 1.6 million executive branch employees who participate in
the Federal Employees Health Benefits Program. OPM also conducted a study of design and
pricing options for medical and dependent care flexible spending accounts (FSAs) across the
executive branch. Features and operation of the premium conversion plan and the FSAs are
described in the Federal Flexible Benefits Plan under Title 5, Code of Federal Regulations
(CFR), Part 892. These reimbursement accounts provide tax advantages authorized under
Section 125 of the Internal Revenue Code and are widely used by both private and public
employers in the United States. In the years since their development, FSA programs have
become an expected benefit that is popular among employees.

OPM has the overall responsibility to maintain the FSAFEDS website, act as a liaison for federal
agencies, facilitate the promotion of the FSAFEDS Program in the Federal Government, and
respond in a timely manner to a contractor’s request for information and assistance. In 2002,
OPM issued a request for proposal (RFP) to solicit third party administrators who could provide
FSA services to federal employees. In March 2003, SHPS was awarded Contract
OMP0303000009 (the Contract), which includes provisions in section I.11 for audits and
inspections of the FSAFEDS program operations.

SHPS is one of the country’s largest independent providers of employee benefit programs and
administration. Its clients include Fortune 100, 500 and 1000 companies, state governments,
federal agencies, hospitals, universities, employee trusts, and health plans. SHPS was formed by
a joint venture between Sykes Enterprises and Health Plan Services in 1997 and is headquartered
in Louisville, Kentucky, with multiple locations throughout the United States.

All findings from our previous audit of the FSAFEDS Program as administered by SHPS (Report
Number 4A-RI-00-08-015, dated April 8, 2009) have been satisfactorily resolved.




                                               1
               II. OBJECTIVES, SCOPE, AND METHODOLOGY
OBJECTIVES

The primary purpose of this audit was to determine if SHPS complied with the regulations and
requirements contained within the Contract for program years 2008 through 2010. Our specific
audit objectives were as follows:

   Health Insurance Portability and Accountability Act
    • To determine if SHPS complied with the Contract’s provisions related to the Health
        Insurance Portability and Accountability Act (HIPAA).

   Cash Management Activities
    • To determine if program funds were held in an interest bearing account separate from
        SHPS’s other lines of business, and if these funds were properly recorded and
        accurately transferred to the FSAFEDS dedicated investment account.
    • To reconcile payroll deductions, investment income, disbursements, claims, and other
        expenses to the financial statements.
    • To determine if SHPS has procedures in place to match expected allotments to actual
        allotments.
    • To determine if SHPS properly calculated and returned forfeitures, and the interest
        earned on forfeitures, to the Risk Reserve account.
    • To determine if the interest earned and/or charged to the FSA Program was calculated
        correctly, was properly allocated and appeared reasonable, and was properly credited to
        the Risk Reserve account.

   Fraud and Abuse
     • To determine if SHPS has policies and procedures in place to help prevent and detect
        fraud and abuse.
     • To determine if SHPS has a system in place to train its personnel in how to prevent and
        detect fraud and abuse.

   Claim Benefit Payments
    • To obtain an understanding of SHPS’s claims processing system from the time a claim
        is received through when it’s paid.
    • To ensure that the system has edits and checks in place to prevent the payment of
        unallowable claims or duplicate claims, and to ensure claims are paid in accordance
        with the Contract.
    • To reconcile the claim payments schedule to the SHPS audited financial statements.
    • To determine if SHPS’s procedures for un-cashed checks are in accordance with the
        terms of the Contract, and if un-cashed checks were properly returned to the Risk
        Reserve account.
    • To determine SHPS’s compliance with the Contract’s Performance Standards, and
        whether appropriate penalties were assessed where these performance metrics were not
        met.

                                              2
   Risk Reserve Transfers
    • To obtain an understanding of SHPS’s procedures for requesting program funds from
        the Risk Reserve account to pay unfunded claims.
    • To determine if SHPS’s protocol for requesting program funds from the Risk Reserve
        account was in accordance with the terms of the Contract and the Federal regulations.
    • To verify that all money borrowed by SHPS to pay unfunded claims was returned to the
        Risk Reserve account.

   Subcontracts
    • To determine if SHPS obtained approval from OPM for any subcontracts that are
        chargeable to the program in excess of $200,000 and more than 25 percent of the
        subcontract cost is charged to the Contract.
    • To determine if OPM's contracting office approved any significant changes to the
       original subcontract, including changes to labor rates and final cost.

SCOPE

We conducted this performance audit in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to obtain
sufficient and appropriate evidence to provide a reasonable basis for our 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 the audit objectives.

This performance audit covered SHPS’s administration of the FSAFEDS Program, including
compliance with the HIPAA and testing the overall effectiveness of its cash management
activities, fraud and abuse policies and procedures, claim benefit payments, risk reserve
transfers, and handling of subcontracts for program years 2008 through 2010.

In planning and conducting our audit, we obtained an understanding of SHPS’s internal control
structure to help determine 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.

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

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 FSAFEDS Program. Exceptions noted in the areas reviewed are set

                                                 3
forth in the “Audit Findings and Recommendations” section of this 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

To determine if SHPS complied with the regulations and requirements contained within the
Contract for program years 2008 through 2010, we performed the following audit steps:

   Health Insurance Portability and Accountability Act

   •   We reviewed SHPS’s response to our HIPAA questionnaire, and its corresponding
       policies and procedures, to ensure that SHPS had complied with the Contract’s
       requirements related to the HIPAA and the protection of individually identifiable health
       information.
   •   We requested the background investigations on 34 of the 313 temporary employees who
       were placed at SHPS by 4 temporary employment agencies that were providing 2010
       Open Season services. We selected the 34 temporary employees based on the first name
       of each billing invoice from November 21, 2010, and every 9th name thereafter. It was
       during this billing period that SHPS received the greatest number of temporary
       employees. Due to concerns identified in our initial review, we expanded our sample to
       107 of the 313 temporary employees to ensure that the required background
       investigations were performed according to the Contract’s requirements.

   Cash Management Activities

   •   We judgmentally selected a sample of 30 payroll office deductions, totaling $41,396,900
       from a universe of 447 payroll office deductions totaling $188,445,585, to determine if
       the FSA funds were held in an interest bearing account separate from SHPS’s other lines
       of business, if these funds were properly recorded and accurately transferred to the FSA-
       dedicated investment account for program years 2008 through 2010, and if SHPS
       followed its process for receiving payroll deductions. Specifically, we selected the
       following:

        1. The 10 payroll offices with the highest payroll deductions, totaling $14,810,498,
           from May 2008, which was the month with the highest payroll deductions collected
           in program year 2008;
        2. The first 10 payroll deductions received in December 2009, totaling $9,877,989,
           since payroll deductions during this month covered 2 program years; and
        3. The 10 payroll offices with the highest payroll deductions, totaling $16,708,413,
           from the 26th payroll period of December 2010, since this was the last payroll period
           covered under the audit scope.

   •   We reconciled SHPS’s payroll deduction and deposit schedules to the allotments reported
       in the financial statements for program years 2008 through 2010 to determine if there
       were any variances in the amounts.

                                               4
•   Using SHPS’s procedures, we compared expected allotments/deposits from the payroll
    offices to the actual allotments/deposits for December 2010 to determine whether SHPS’s
    records accurately reflected the amount received from the payroll office. This time
    period was selected for review because it was the most recent month in the audit scope
    and was, therefore, the month with most readily available data.
•   We reviewed the forfeitures schedule for program year 2010 and reconciled this schedule
    to the amounts reported on the 2010 financial statement to determine if SHPS properly
    calculated and returned forfeitures to the Risk Reserve account. This program year was
    selected for review because it was the most recent year in the audit scope and was,
    therefore, the year with the most readily available data.
•   Using the investment income schedules, we selected the quarter with the highest net
    investment income earned from each program year (1st quarter 2008, 1st quarter 2009,
    and 3rd quarter 2010) to determine whether interest earned and/or charged to the FSA
    Program was calculated correctly, was properly allocated and/or appeared reasonable,
    and was credited to the FSAFEDS Program (Risk Reserve account). Specifically, we
    selected the following:

    1. The highest net earnings per quarter during 2008, totaling $745,877, from a universe
       totaling $2,044,996;
    2. The highest net earnings per quarter during 2009, totaling $132,027, from a universe
       totaling $179,172; and
    3. The highest net earnings per quarter during 2010, totaling ($32,427), from a universe
       totaling ($231,224).

Fraud and Abuse

•   We reviewed SHPS’s response to the anti-fraud questionnaire to determine if SHPS has
    policies and procedures to prevent and detect fraud and abuse, and if SHPS has a system
    in place to train its personnel in how to prevent and detect fraud and abuse.

Claim Benefit Payments

•   We performed a walk-through of the claims processing system, and obtained and
    reviewed the claim system’s procedures and flowcharts, to gain an understanding of the
    claims flow from the time a claim is received by SHPS until the claim is paid.
•   We selected a judgmental sample of 25 FSA enrollee accounts (5 FSA enrollees with
    Dependent Care accounts, 15 FSA enrollees with Health Care accounts, and 5 FSA
    enrollees with Limited Care accounts) with total claims paid of $57,114, out of a universe
    of 359,139 FSA enrollee accounts with claims paid totaling $786,406,213 for program
    year 2010. This year was selected due to the large volume of claims in the audit universe
    and the availability of the data for review. Accounts were selected based on the type of
    account, and with various amounts paid within $0 to $5,000. Specifically, we determined
    the following:

    1. Whether SHPS had edits/checks in place to prevent the payment of unallowable or
       duplicate claims, and to ensure claims were paid in accordance with the Contract.

                                            5
        2. Whether SHPS only reimbursed the subscriber up to the amount elected in their FSA
           account.

   •   We reconciled the 2010 claims payment schedule to the financial statements to determine
       if there was any variance to the amounts reported in the financial statements. This
       program year was selected for review due to the availability of the data and the large
       volume of claims in the audit universe.
   •   We reviewed SHPS’s procedures for returning un-cashed FSA benefit checks to the
       FSAFEDS Program to determine if these procedures are in accordance with the terms of
       the Contract. We also reviewed a list of FSA un-cashed checks issued during program
       years 2008 through 2010 to determine if un-cashed checks were properly returned to the
       Risk Reserve account. Our review consisted of a universe of 4,146 un-cashed checks
       totaling $600,718.
   •   We judgmentally selected the month of December 2010 to determine if SHPS complied
       with the performance standards defined in the Contract, and to ensure that penalties were
       assessed where the standards were not met. The month of December 2010 was selected
       because the “at risk” percentage of abandoned calls appeared to not meet the Contract’s
       required performance standards for this metric.

   Risk Reserve Transfers

   •   We reviewed SHPS’s policies and procedures for requesting funds from OPM to pay
       unfunded claims to determine if these procedures are in accordance with the Contract.
   •   We reviewed the wire transfers from SHPS to OPM to verify that all money borrowed by
       SHPS to pay unfunded claims was returned to the Risk Reserve account according to the
       Contract.

   Subcontracts

   •   We reviewed the list of subcontracts and their approvals during program years 2008
       through 2010 to determine if there were any subcontracts where SHPS costs exceeded the
       Federal regulation threshold, and if these costs were allowable, allocable, and reasonable.

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

We used the Contract, the Federal Acquisition Regulations, and the FSAFEDS regulations (5
CFR Part 892) to determine whether SHPS’s policies and procedures related to the HIPAA, cash
management activities, claim benefit payments, risk reserve transfers, and policies and
procedures related to subcontracts were in compliance with the terms of the Contract and the
applicable regulations. We also determined whether SHPS had policies and procedures in place
to detect and prevent instances of fraud and abuse related to its administration of the FSAFEDS
Program.



                                                 6
The results of the audit were discussed with SHPS during fieldwork and at the exit conference.
In addition, a draft report, dated May 2, 2012, was provided to SHPS for review and comment.
SHPS’s comments on the draft report were considered in preparing this final report and are
included as Appendices to this report.




                                               7
             III. AUDIT FINDINGS AND RECOMMENDATIONS

A.   HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT

     1.   Temporary Employees with Criminal Convictions                             Procedural

          Five temporary employees with prior criminal convictions were placed at SHPS by
          the vendor           to assist with the 2010 FSAFEDS open season. Three of these
          employees had a history of theft, one employee had a prior conviction of illegal drug
          possession, and one employee had a history of both theft and illegal drug possession.

          SHPS Standards Regarding Background Checks require vendors to conduct a
          background investigation on temporary employees prior to placement. The standards
          also state that temporary employees should not be placed with SHPS if they were
          convicted of theft or illegal drug possession.

          Additionally, the Health Insurance Portability and Accountability Act’s (HIPAA)
          Security Rule for workforce clearance, section 164.308(a)(3)(ii)(B), requires SHPS to
          address whether all members of the workforce with authorized access to electronic
          protected health information receive appropriate clearances.

          SHPS receives temporary employee services from four vendors to help staff the
          FSAFEDS open season. As part of our HIPAA review, we sampled 107 of the 313
          temporary employees placed at SHPS in 2010, to determine if these individuals had
          background checks prior to placement. From our review of the 107 background
          investigations, we identified five employees with criminal convictions that should not
          have been placed with SHPS. All five individuals were placed by the vendor
                       and may have had access to protected health information and personally
          identifiable information belonging to Federal employees. This mistake placed all
          Federal employees who participate in the FSAFEDS Program at risk for identity theft
          and may be considered a HIPAA violation. Fortunately, SHPS and
          identified the mistake within eight days of placement and removed the employees. In
          all five incidents,           indicated to SHPS that the temporary employees had
          cleared the background investigation prior to placement.

          SHPS’s Response:

          SHPS agrees with this finding and has initiated corrective action to meet each of our
          recommendations.

          Recommendation 1

          We recommend that the contracting office require SHPS to verify and review each
          temporary employee’s background investigation prior to placement with SHPS.



                                               8
          Recommendation 2

          We recommend that the contracting office require SHPS to perform a risk analysis to
          assess the vulnerability of its protected health information and implement the
          appropriate safeguards pursuant to the HIPAA Security Rule 164.308(a)(3)(ii)(B) –
          Workforce Clearance.

          Recommendation 3

          We recommend that the contracting office require SHPS to stop using vendor services
          from           if it continues to provide temporary employees in violation of SHPS
          Standards Regarding Background Checks.

B.   CASH MANAGEMENT ACTIVITIES

     1.   Investment Income not Credited to the FSAFEDS Program                    $1,307,040

          SHPS did not credit $1,307,040 of investment income earned on FSA funds to the
          FSAFEDS Program.

          We reviewed the investment income earned on FSA funds to determine if all
          investment income was returned to the FSAFEDS Program. During our review, we
          found that SHPS earned $2,129,571 in investment income from 2008 through 2010.
          From this amount, $722,168 was used to pay banking fees, and another $1,307,040
          was used to pay for the following unauthorized deductions:

             •   $614,922 was used to pay the 2008 and 2009 management fees (1 percent of
                 the FSA funds invested),

             •   $607,388 was used to pay the 2008 income tax (38.9 percent of the investment
                 income earned), and

             •   $84,730 was retained by SHPS as profit in 2008 (50 percent of the net
                 investment income).

          The remaining balance of $100,363 was returned to the FSAFEDS Program.

          SHPS should not have used the interest earned on FSA funds to pay management fees
          and income tax. Additionally, SHPS should not keep 50 percent of the net investment
          income. When we asked SHPS why it did not credit the program for the full amount
          of investment income, net of banking fees, SHPS reported that there was an
          agreement with OPM authorizing the use of investment income to pay management
          fees and for SHPS to keep 50 percent of the net investment income. We requested a
          copy of this agreement between OPM and SHPS, but neither party could provide
          documentation to show that the agreement existed.


                                             9
Section I.29(b) of the contract between SHPS and OPM states that all investment
income earned on FSA funds must be credited to the FSAFEDS Program. The only
exception to this requirement is listed in OPM Contract Modification 003, Exhibit B,
Part (3), which allows SHPS to use the interest earned on allotments to pay for claims
reimbursement and banking fees. Additionally, section I.15(a) states, “No oral
statement of any person shall modify or otherwise affect the terms, conditions, or
specifications stated in this contract. The duly authorized Contracting Officer must
make all modifications to the contract in writing.” Finally, Section C, Part XI, page
C-41 of the contract defines a Contracting Officer as “The OPM employee who has
the authority to bind the Government under the resulting contract with the
Contractor.”

As a result of SHPS not crediting the FSAFEDS Program for all of the investment
income earned on FSA funds, the FSAFEDS Program lost $1,307,040.

SHPS’s Response:

SHPS disagrees with the finding and provided excerpts of a presentation given in
March 2006 between SHPS and OPM’s Contracting Office to support its position. It
contends that Page 14 of the presentation describes the “50/50” split of net income
and then claims that the recommendations included in the presentation were adopted
by OPM and integrated as part of normal operations. SHPS also argues that because
of the fall in interest rates that started in 2008, and continues through today, interest
has been insufficient to cover its expenses. However, it has chosen not to invoice the
shortfall to the Program Office, which has resulted in a substantial savings to the
program.

While no documentation exits to support OPM’s agreement with the
recommendations that were part of the March 2006 presentation, SHPS did provide a
series of emails between OPM’s Program Office staff during March 2009 that
confirm SHPS was retaining the interest as income, that SHPS had the income tax
liability, and that the income was created from bank accounts used by FSAFEDS.
SHPS claims that there were no challenges from OPM regarding SHPS’s response to
these e-mails, as the responses were consistent with the March 2006 meeting and
Modification 003 to the Contract.

Finally, SHPS cites Modification 003, Exhibit D for why it retained a portion of the
interest income. It states that the exhibit is an agreed upon list of additional services
and the estimated incremental service fee that may be payable to SHPS if those
services are provided. One of the services included on this exhibit is “Banking and
Interest”, which OPM and SHPS understood entailed the payment to SHPS for
banking and interest services from the interest income itself rather than as a separate
fee. Transfer records confirm that, both before and after the execution of
Modification 003, payment for these services was based on the split of income and
this split was consistent with the terms described in the March 2006 presentation
mentioned above.

                                      10
          SHPS does agree that policies and procedures regarding the treatment of investment
          income should be developed and implemented, and recommend that this be addressed
          in the next contract modification.

          OIG Comments:

          We do not concur with SHPS’s response, on the basis that the Government was never
          obligated to pay SHPS $1,307,040 out of the investment income earned on FSA funds
          for the following reasons. Modification 003’s Exhibit D, which did provide for the
          payment of these services out of investment income, was no longer in effect during
          the scope of this audit. Modification 005, effective January 1, 2008, removed
          paragraphs ii and iii from Exhibit B, which eliminated the true up and incremental
          service fees shown in Exhibit D, and increased the health care flexible spending
          account fee from $4.00 to $4.35 to account for these services. We would also argue
          that the “50/50” split of net income, although presented to OPM in a March 2006
          meeting, never became enforceable under the Contract because it was never formally
          agreed to by the Contracting Officer. As mentioned above and included in the
          contract document, the Contracting Officer is the only employee who has the
          authority to bind the Government under the Contract. Therefore, we continue to
          maintain that the $1,307,040 paid to SHPS out of the investment income earned from
          2008 through 2009 should be credited back to the Program.

          Recommendation 4

          We recommend that the contracting office require SHPS to credit the FSAFEDS
          Program $1,307,040 for investment income earned during years 2008 through 2009.

          Recommendation 5

          We recommend that the contracting office require SHPS to implement policies and
          procedures to ensure that all investment income earned on FSA funds, less any
          amount used for claims reimbursement and banking fees, is credited to the FSAFEDS
          Program.

C.   FRAUD AND ABUSE

     The results of our review showed that SHPS has policies and procedures in place to help
     prevent and detect fraudulent activity.

D.   CLAIM BENEFIT PAYMENTS

     The results of our review showed that SHPS has proper controls in place to ensure that
     claims were paid in accordance with the contract.




                                              11
E.   RISK RESERVE TRANSFERS

     The results of our review showed that SHPS followed the Contract requirements for
     requesting and returning borrowed funds to the Risk Reserve account.

F.   SUBCONTRACTS

     The results of our review showed that SHPS complied with OPM’s contract provision
     when awarding subcontracts.

G.   LOST INVESTMENT INCOME                                                             $163,206

     The FSAFEDS Program is due $163,206 for lost investment income (LII) calculated on the
     Investment Income not Credited to the FSAFEDS Program finding in this report
     (calculated through August 31, 2012).

     Section I.29(e) and (f) of the contract between SHPS and OPM requires, among other
     things, that the contractor pay the FSAFEDS Program investment income that was lost as a
     result of failure to credit income due under the contract. The LII will be paid from the date
     the income was not credited and will end on the earlier of: (1) the date the amounts are
     returned to the FSAFEDS Program; (2) the date specified by the Contracting Officer; or (3)
     the date of the Contracting Officer’s final decision. All amounts payable will bear LII
     compounded semiannually at the rate established by the Secretary of the Treasury.

     We computed LII that would have been earned using the semiannual rates specified by the
     Secretary of the Treasury. Our computations show that the FSAFEDS Program is due LII
     of $163,206 for the period January 1, 2009 through August 31, 2012, on questioned
     amounts from the period January 1, 2008 through December 31, 2010. The Program is also
     due any additional LII accumulated after August 31, 2012 until all funds have been
     returned to the Program.

     SHPS’s Comments

     The draft report did not include LII on audit findings. Therefore, SHPS did not address this
     item in its replies.

     Recommendation 6

     We recommend that the contracting officer require SHPS to credit the FSAFEDS Program
     $163,206 for LII on the audit findings calculated through August 31, 2012, plus any
     additional LII accumulating after that date until all questioned costs have been returned to
     the Program.




                                               12
             IV. MAJOR CONTRIBUTORS TO THIS REPORT
Special Audits Group

              , Auditor-In-Charge

                , Auditor


                  Group Chief,

              , Senior Team Leader




                                     13
                                                                                          SC HEDU LE A
                                            AL"DIT O F THE

                            FEDERAL FLEXI BLE SPEI\"DING ACCOUI\, PRO GRAl\I

                                      AS AD~ IIl'\ISTERE D BY SH PS


                                   SUM MARY OF CO NT RACT CHARG ES

                                    2008              2009              2010                 Total

A   Allotments Received            $596,995,436      $706,568,189       $794,00 1,064       $2,097, 564,689

B. Claim Payme nts                 $593,7 89,283     $702,076,23 6      $786,5 12,741       $2,082,378,260

C. Servi ce Fees Received           $14,478,877       $16, 154,506       $ 17,967,27 8        $48,600,661

D. Total Expe nses                  ($ 14,265,967)    ($ 14,33 1,606)   ($ 16,47 1,123)       ($45,068,696)
                                                                                                                                          SCHEDULE B
                                                                             AUDIT OF THE
                                                              FEDERAL FLEXIBLE SPENDING ACCOUNT PROGRAM
                                                                        AS ADMINISTERED BY SHPS

                                                                     SUMMARY OF QUESTIONED COSTS

AUDIT FINDINGS                                                                2008        2009        2010        2011        2012           Total

A. HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT
   1. Temporary Employees with Criminal Convictions                                  $0          $0          $0          $0          $0       Procedural

B. CASH MANAGEMENT
   1. Investment Income not Credited to the FSAFEDS Program                  $1,201,063   $105,977           $0          $0          $0      $1,307,040

C. LOST INVESTMENT INCOME (From Schedule C)                                          $0    $63,879     $44,046     $36,490     $18,791         $163,206

TOTAL QUESTIONED COSTS                                                       $1,201,063   $169,856     $44,046     $36,490     $18,791       $1,470,246
                                                                                                                                                      SCHEDL"LE C
                                                                      AUDIT OF THE

                                                      FEDERAL FLEXIBLE SPEl\"l)ll\G ACCOL1'iT PROGRA.' 1

                                                                AS AD:\ITh'lSTERED BY SlIPS


                                                            LOST    I l'.'VESnl El'.~   l S CO:\I E C AL CL'LATI OS

                       Year                                2008                 2009                  2010            2011            2012               Total

A. Q uestioned C ha rg es (Subj ect to Lost I nve snn eur Income)

    Investment Income not Credi ted to the                 $1.20 1,063            $105,977                     $0
              $0              $0       $1.307, 040
    FSAFEDS Progr am


B. Lost Investme nt Income Ca lcula tio n - Compoun d Interest Ml'thod

    a. Prior Period Total Que stioned Costs                         $0          $1.20 1.063           $1,307 ,04 0    $ 1,307. 040    $ 1.307.040
    b. Prior Period(s) Interest                                     $0                   $0              $63 ,87 9      $107. 925       $ 144 ,4 15
    c. Cummulative Total                                            $0          $1.20 1.063           $1,370. 9 19    $ 1,4 14. 965   $1.45 1.455

    d. Tre asury Rate : January I - June 30                     4.750%                  5.625 %           3.250%           2.625%          2.000%

    e. Interest: January 1- June 30                                 $0             $ 33,780              $22.277         $18.571         $14. 515

    f. Prior Period Cunanulative Que stioned Cost s                 $0          $1.234.8 43           $ 1,393,196     $ 1,433 .53 6   $1,465.970

    g. Interest Rate : July 1 - December 3 1                    5.125%                  4.875%            3.125%           2.500%          1.750%

    h. Interest: Jnly I - December 31                               $0             $30 ,099              $2 1,769        $17.9 19          $4.276

                   Total Lo st I uvest meur I ncome                 $0             $63,879               $44 ,046        $36,490         $18, 791          $163,206
                                                                                                             AP I'ENIHX A





                                                                       2 nI2 JU~- 1 FH2: ,


June 1, 2012


lJ S. Office of Persoonet Mana g e:nent
Office o f tne Inspector General
Attn: • • • • • • •
1900 E: S tre e t, NW, Rll. 6400
Wa s!'llngton , DC 2()41 5-1 100


RE : Report No. 4A-RI-OQ-Ol -05 0




ADP Benefit S ervices KY, Inc. (fcr -nerly krlCV.ll a s SHPS Human Resource Solunons. Inc. (SH PS H RS )) .
is p leased to provloe you wit n our respo nse to the reco-nrrend anons tn at were presen ted a s a re sult of
the recent e cnt of the FSAFED S program by the Office ot the Inspector General (DI G). For your
               we have pro vid ed a-separate response for ea cn sern outlined i,' l the DI G's re cort .
conven ie nc e .


If yo u ha ve a ny qu es tions after re viewi ng our feedback, please d o not hesitate to con tact u s ro­
clannca non .



Sincer ely ,
T emporary Em ployees w ith Cri m inal Convic tions

        Recommendati o n 1: Con tracting Office requires SHPS to venfy and rev e w each temporary
        employee's backg round inv estigation prior to placement.


        SHPS HRS Res pons e:
        We agree \Mth this recommenda tion. Following tre identification of this issue, changes we re
        immediately enoerrentec . As ide ntified in your repo rt, INC acted oecsrvery to dism iss workers
        and prevent the recurrence of this prob lem. This has been remediated by mcependenny
        screening workers pror 10 placement We are no longer relying on the backgrou nd check s
        comp leted by provid ers of temporary w or kers.

        Recommend atio n 2: Perfo rm a risk analysis to asses s the Vl.iln erabi1lty of protected reattb
        mtormauon and implement appropriate sateq ueros.

        SHPS HR S Res pon se:

        We agree w tn the reco mmendation.


               I Tas k                                          I Sta tus
                          Risk Aralysis                           Comclet e
                          Risk Managemert                         Complete
                          Sanct ion Policy                        Comelete
                          Information System Activity Review    I Complete .   No exceptions .


        Recomme ndation 3: Stop using vendor services from _ f they continue to provi de
        workers in violation of star- da res.

        SHPS HRS Respon se:

        We agree with t his recom mendation.


Ca sh Management

        Reco m mendatio n 4: Reco mmend tile Cor-tractinq Office require SHPS to credit the FSAF ED S
        Program $ 1,259,230 for the investme nt income earned durir.g the yea rs 2008-20 10.

        SHPS HRS Respon se:
        We disagr ee with this recommeroator . FollO'Ni ng the OIG visit, additional documentation wa s
        ider -ttted that provides rrore detail regarding investment income procedu res. The documents
        (attached) arc excerpts from a presertation given at a March 2006 meeting between SHPS HRS
        leadership and the Contractin g Office The recommendalions in the presentation w ere adopted
        by O PM and integrated as part of normal operations. The presenta t ion materials were kept by
        OPM in the 'con tract file'.
Page 14 of the presentation describes the "50/50" split of net income. The spreadsheet shows

details regarding the split of interest income that were provided to, and audited by, the OIG during

their visit. No irregularities were found.


Please note that the agreed upon procedure for handling investment income also entitled SHPS

HRS to "invoice OPM each quarter when interest is insufficient to meet the plan's expenses".

Because of the fall in interest rates that started in 2008, and continues through today, interest has

been insufficient to cover expenses. The shortfall through 2010 was $1,217,842 and totals

$2,048,475 through February 2012 (see attached schedule). SHPS HRS chose not to invoice the

shortfall to the Program Office, which has resulted in a substantial savings to the program.


Through the parties' sharing of interest income and SHPS HRS's decision to forgo invoicing the

program for the financial shortfall, SHPS HRS has complied with the parties' agreement reached

in the March 2006 meeting, which also refiects the spirit of the original contract (section 1.29

Investment Income) wherein the program is to benefit from investment practices.


Recommendation 5: Contract Office require SHPS to implement policies and procedures

regarding the treatment of investment income.


SHPS HRS Response:

We agree with this recommendation. We recommend the treatment of investment income be part

of the next contract modification.

~SHPS'


SHPS Follow-up Response to OPM
Contract and Scope Discussion


March 28,2006
                                 Contents


~ Organization chart containing OPM Team FTEs

~ Sample Ticket

~ Invoices and Billing Detail

   •   Server and Installation
   •   Portal Development and Implementation
   •   Bank Fees and Interest
   •   Grace Period
   •   Open Season Marketing
   •   Agency Billing
   •   Reports
   •   System Enhancements



                                                1
                                        Contents


     >-   Invoices and Billing Detail   (Continued)

          •   Web Management
          •   Web Response
     >-   Missed Billing File
     >-   Next Steps




t)SHPS'                                               2
     Bank Fees and Interest


     From our discussions In Washington, SHPS is seeking to recover bank fees, income tax
     obligations, Investment management fees. Our model contemplates a split of remaining
     amounts (after expenses) with OPM. The resulting amount would be credited to the risk
     reserve quarterly. This model will not yield any payback to OPM for 2004 or 2005.
     generated.

     ~iIl schedule a separate meeting with OPM this week to review the model
     and address any questions or ideas.




eJ)SHPS·                                                                                     8
    Bank Fees and Interest

          -   SHPS will split '50/50' the net income (interest earned that exceeds the obligation
              to pay actual bank fees, actual postage to mail participant checks, tax obligation,
              and investment management fee) with OPM. This amount will be credited to the
              risk reserve each quarter. SHPS will invoice OPM each quarter when interest is
              insufficient to meet the plan's expenses.

    Results

          -   This methodology did not yield any 'pay-back' for OPM for 2004 or 2005. SHPS is
              invoicing OPM for those amounts.

        -     This methodology generated a $35,000 credit to FSAFEDS in January 2006 and
              should yield a similar amount for February.

          -   Under this methodology, both OPM and SHPS meet its obligation under the
              standing contract, as described in the Inspector General's 2004 audit. Our
              obligation are to:

               •	   "Invest FSA funds on hand"

               •	   "Within the constraints of safety and liquidity - seek to maximize investment
                    income"

               •	   "Income earned in FSA funds must be credited to the Federal FSA Program"




t)SHPS·                                                                                             14
                                 200B
                                January             February            March            62d1            t@y              June           ~             August       September          October         November        December
Total Interest Income    s      360.207.79   s       232,201.10     $147,591.15     s 72,357.31 s 44,594.12 s 44,097.41 s 50,261.00 s 61,384,74                    $106.043.40     $151,787.72     $148,856.62     S 142,024.41
Mgl Fee-Bank
Fees+lncome Tax
Ltab.                    S      235,012,99   S       174,442.11     $129,820.44     $ 81,865,67 $ 63,832.43 s 58,016.31              s 59.605.12 s 71,000,34 s 99,575.35           S 125.940,79    $135,861.37     $141.340.81
Arnountto be Split       $      125,194.80   S        57,758.99     s 17.770.71     I ('},50B,JG\ S(19.238.31) S(13.:113.96)         S (9,)·14,12) \ (9,G15.60) $ 6,468,05         S 25.846.93     S 12,995.25     S    683.60
   SHPS Share            S       62,597,40   s        28,879.50     s 8,885,36      S             S            s                     $             s            s 3,234.02         s   12;923,47   s    6,497.63   S    341.80
   QPM Share             s       62,597.40   s        28,879,50     s  8,885,36     $             $                 s                s             s               s
                                                                                                                                                                  3,234,02         S 12,923,47     s    6,497.63   $    341.80

                                 2009
Total Interest Income    $      121,380.59   $        59,573.51     S 28,243.05     $ 10,547.36     s   15,065.27   516,974.85       $ 14,481,39   s   11,750,43   s   15,428.08   s   19,861.80   s   20,509.03   s   24,384.62
Mgl Fee-Bank
Pees-Income Tax
liab.                    ,      143,333,00 $        106,046,77      s   74,610.09   s 46,563.36 s 52,726.43   $ 49,385.40 s 50,051.58 s 49,089.15                  s   53.725.09   $ 74,203.63     s   87,982.55   5103,744.49
Amounl to be Splil
   SHPS Share            ,
                         \      (21,952.41) S
                                             ,      ('16,47:l,26)   s (45,367.04)
                                                                    S
                                                                                    5136,016.80) $(37,661,16) $(32,,110.55) $(35,570.19) $(37,338.72\
                                                                                    s               s               ,s               S             s
                                                                                                                                                                   s (38,297.01) S (54,34L33) S (SiAiJ.52) S (79.359.1371
                                                                                                                                                                   s             s            s            s
   QPM Share             S                   s                      s               s               s                                s             S               s               S               S               s
                                 2010
Total Interest Income    $       40,483.64   s        32,220,77     $ 26,011.34     s 20,307,57 s       22,225.86   s    22,021.02   s 21,047.17 s 25,510,25       S 28,992.65     S 40,468.50     5 44,826.64     s   46,357.34
Mgt Fee+Bank
Fees-Income Tax
Liab.                    s      123,385.42 s        100,104.19 s 97,322.00 S 66,545.49 s 67,852.46 S 57,013.76 s 49,165.28 $ 63,254.33 S 68,738.63                                 s 87.071.39 s 99.611.55         S 113,363.95
Amovnt tc be Split       I      (82,901,78) S       (67.883,42) $ j71,310,S6) $(46,237.92) $(45,626.60) $(34,992.14) 5(28,118,11) 5(31,744.08) s (19,745.98)                       s (46,602.89) $ ($4,78,1.91)    S (67,006.61)
   SHPS Share            s                   s                      $               s               s               s                $             s               S               S               s               S
   OPM Share             s                   $                      S               s               s               s                s             s               s               s               s               S

                                 2011
Total Interest Income    s       39,663.55   s        28,277.35     s   19,739,01   s   13,379.44   s   10,698.30   510,517.89       S 9,906.58    s   11,457.97   s   15,378.99   s   12,264,36   $ 15,661.34     s   17,982,57
Mgt Fee+Bank
Fees+lncome Tax
Llab.                    S      127,346.43 s          98,088,02 s 77,762.59 s 63,563.96 s 51,838.59 s 47,996.75 s 44,735.82 5 47,61J..78 s 58,455.98                               S 76,563,78     s  92,612.38    s 69,366.51
Amount to be Spill       I      (87,682.88( S        (69,810,67) $ (58,OZ3.58) $(50,11}4,5Z) 5(41,140.29) $(37,418.86) $(34,829.24) $(36,155.81) $ (43,076.99)                     s (64,299.42)   $ (16,951.04)   s (51,383.94)
   SHPS Share            s                   S                      $               s               s               s                s             s               s               s               s               s
   OPM Share             s                   s                      s               S               s               s                s             s               s               s               s               $

                                2012
T ctarIoterest Income    $      20,661.10    s        14,897,17
Mgl Fee+Bank
Fees+lncome Tax
Liab.                    $      119,443.26   s        95730.65
Amount to be Splil      -S;--;""'~<7oc-+-~S",""'c-
                             (98,782.16) S (80,83J.48)
   SHPS Share            s                   s
   OPM Share             $                   S

                        ShortFall
                             2008            $    (61,625.35J
                             2009            So  (533,261.56)
                             2010            $ (522,955.70)
                        Sub-tolal            $ (1,217,842.61)

                             2011           $       (651,017,24J
                             2012, thru Feb $       1179.615, 641
                        Total                So   (2,048,475.49)
                                                                                                            A Jl I'E~ I)IX   H




June 8, 2012


               Senior t e em Leader
Off ice of m e Inspector General
U. S. Office of Personnel Management
800 CranbelTY Woods Drive, Suite 130
Cranberry Townsl1ip, PA 16065

RE: Report No. 4A·R~ I.()60

De"• • • • •

ADP Senefit serv ices KY, Inc. {formerly known as SH PS Hu man Resources Sotct tcns Inc.IS HPS HRSII is.
pleased t o pro\l ide you with fol low-up responses t o you r 6/ 1/2012 em ail. For you r convenience, we
hav-e provide d a se parat e res ponse for ea ch item ou tlined .in yOu r ema il t o us.

If you have any questions after relliewing our feedback, please do not hesitat e to con tact us for
clarification.


Sincerely,




 Ice reSl en 0     « ra nee
11405 Bluegrass Parkway
Louisville, KY 40299
(50212 53·5 622
kevin.scarborough@shps.com
                                      Deleted by th e OI G

                               No t Relevant to th e Ftn al H ~(JOrl





Qut>st ion : SHPS stat es t hat t he in fo rmatio n in t he presentat io n wa s ado pte d b ~' OPM. Does SHPS
have an y do cume nt atio n sh owing t hat OPM acce p te d t he lnve stme nt income p ro ced ures? This
can be a n em ail, m em o, or a ny form of a written agre e me nt/ acce ptance .

Respo nsEc': Sli PS does not ha ve docume ntation of accepta nce fro m OPM. lIow@ve r, ina se rie s of
ema ils bfl.twfl.en                           :Jndvarious individuals atSIIPSdu ring March .1-5.2009. it
was co nfirme d SHPS wa s re ta ining t he inte re st as inco me. SHPS had the jncome tax liability and th e
income wa s crea ted fro m ba nk a ccounts used by FSAH DS. See att ac hed . The re we re no challen ges
by SliPS to t hfl' inq uiry o r from OPM rega rding ou r resp onse, a s it was con siste nt with the Ma reh
2006 meeting a nd Mod 3.




                                  Deleted by th e (JI G
                            Not Relevant In the F inal Rep ort
                                Deleted by the OIG

                          Not Relevant to the Final Report





As it relates to SHPS' actions in retaining a portion of interest income, please see Mod 3, Exhibit D:
'Additional Services/ Incremental Service Fee Adjustments.' The Exhibit is an "agreed upon list of
additional services and the estimated incremental service fee PHPM that may be payable to SHPS".
If SHPS provides a service included on the list, SHPS is due a fee as described. If a service included on
the list wasn't rendered, the corresponding fee wasn't payable.

One of the services included in Exhibit D is "Banking and Interest, Actual fees plus management fee
vs. Interest Income" with the "Fee Basis" listed as "Interest income." Both OPM and SHPS
understood this line item to mean that SHPS was to be paid for the "Banking and Interest" services
relative to investment of idle funds, and that this payment was to be taken from the interest income
itself rather than paid as a separate fee. Transfer records confirm that, both before and after the
execution of Mod 3, the parties accomplished this payment based on the split of income, and that
the details of that split were defined in the March 2006 meeting, based on the terms described in
the SHPS presentation made at that meeting. Although SHPS acknowledges that there could have
been more written documentation of the specific payment terms, this agreed-to split is consistent
with the payment structure set forth in Exhibit D.




Question: SHPS states that it has complied with the agreement reached by both parties in the
March 2006 meeting. Again, the OIG would like for SHPS to present some form of evidence of this
agreement. OPM Contracting has no record of this agreement and we have no support showing
that OPM agreed to any information presented in a meeting.


Response: We agree there is insufficient written evidence of this agreed upon procedure. In our
response to the draft, we agreed with recommendation # S calling for the establishment of policies
and procedures.




                                  Deleted by the OIG

                            Not Relevant to the Final Report

                                                                                                        Page t of 4




From:
Sent:    Monday. March 05. 2012 9:35 AM
To:
Subje ct : OPM - interest income
Per our cnscussscn
                                       - -- ----- - - - -- - -- -      -   - - - - - ---- - -----   -




Does the "t otal current month avg daily balance" re present 10 0% FSAFEDS
allotments?


              !ii••ii·iiII~~....· . ·shps.com]


        -
        1 dId confirm Wlltl _that tne items listed as ·OPM" on the PDF were for j ust OPM. SO, you
        can reference line 2 of the top and rriddle sections; the bottom section (labeled OPM Summary)
        is ell OPM.


        can you an swe r _uestion below, please?




        -
        Thanks




        Another question related t o t his t opic. How is SHPS booking the allotment
        flow - as a liability or revenue?

                 F,,;~t "l Message-

                 Sent: Thursday, Mardl OS, 2009 9:35 AM

                 To;
                 Cc:
                 Subject: RE: Money &. Tax



5/3/2012
                                                                                                      Page 2 of 4


            Yes, actually. I did glance at it and saw tha t QPM was specifICally listed . This is what _
            provided the IG. I'll confirm wiU          just left him a VM) j ust to make sure.


            From:                                opm.gov]
            Sent: ThUlSday, March as, 20099 :30 AM
            To:
            ce
            Subject: RE: Money & Tax

            By chance           and be honest       did you look at t he attachment ? ©

            This appears t o be a comingled report - I don't want t o risk extracti ng
            answe rs to my questions and my conclus ions be ing incorrect cause I'm dealing
            with Q non·FS AFEDS specif ic report.

            Please bounce my quest ions bac k for answers and if there is more inf o that's
            needed to paint a complete picture - go ahead and have them include it.

            Thanks ...



                     ---Original Message-­

                     From:
                                              shps.com]
                     Sent: Wednesday, March 04,2009 3:14 PM

                     To:
                     Cc:
                     Subject: RE: Money & Tax

                     See if this helps!


                     From:                                   gopm.gov]
                     sent: Wednesday, March 04, 2009 2: 7 pM
                     To:
                     Cc:
                     Subject: RE: Money & Tax

                     Well..just a bit more before we can close this one                     .

                     Please pick a yeor - 08 if you have all t he data, oth e rwise 07 - and let
                     me know what ....

                           1)    the total "income" VIas
                           2)   t he income tax cho:oge
                           3)   t he total int eres t income
                           4)   t he other banking f ees that bounce against t he interest eamed



51312012

                                                                                        Page 3 of4


             When you can        thanks !



                                                                     shps.com]




                  One down!


                  1) 1s the allotment stream considered income to SHPS? yes


                  2) Are tnccrre taxes assessed/ paid on the allotment stream? yes


                  3) !f so, 'Nho is paying those taxes.....non·fsafeds SHPS or FSAFEDS-SHPS. The

                  tax JO belongs to SHPS, Inc.


                  4 ) !f FSAFEDS-S t-l.PS, where are the funds coming from... Jnterest earned on the

                  checking accounts that house the allotment stream or somewhere else? in

                  Interest earned from the OPM checking accounts.





                  To:
                  Cc:
                  Subject: Money &. Tax

                  We heard from the aPM audit team that the allotment stream
                  into SHPS may be taking on the form of income.....from a tax
                  perspective.

                  We need to know.,....

                        1)	 Is the allotment stream considered income to SHPS?
                        2)	 Are income taxes assessed /paid on the allotment

                           stream?

                        3) If so. who is paying those taxes.....non-fsafeds SHPS or
                           FSAFED5-SHPS.
                        4) If FSAFED5-SHPS, where ar e the funds coming
                           from....int erest earned on the checki ng accounts t hat
                           hous e the allotment stream or so mewhere else?

                   No rush as    r am aware that both of you are recovering fr om an
                  overdose of glue f umes.....

5131201 2

                                                                                           Page 4 of4




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5/3/2012