Fraud Prevention in Benefits Administration: Protecting Plans and Participants

Benefits fraud is a growing concern for HR professionals, especially as employers navigate increasingly complex health and wellness offerings. From inflated claims to ineligible dependents, benefits-related fraud can lead to significant financial losses, legal exposure, and reputational damage. A proactive, well-informed HR team plays a critical role in prevention.

Here’s what every HR department should know and do to prevent fraud in benefits administration.

1. Know the Common Types of Benefits Fraud

   Fraud can originate from multiple sources, including employees, dependents, and even service providers.

   Common examples include:

   • Enrolling ineligible dependents (e.g., ex-spouses, adult children who no longer qualify)
   • Falsified life event documentation to trigger coverage changes
   • Misuse of FSA or HSA funds for non-qualified expenses
   • Phantom providers or fake invoices in self-funded plan environments
   • Misreporting employment status to continue receiving benefits (e.g., in severance or leave scenarios)

   Understanding how fraud occurs helps HR and benefits teams remain vigilant.

2. Implement Dependent Eligibility Verification

   One of the most effective ways to prevent fraud is to verify that all covered dependents meet eligibility requirements. This can be done through:

   • Initial audits during open enrollment
   • Targeted audits for specific categories (e.g., adult children)
   • Ongoing documentation requirements for life events like marriage or adoption

   Audits not only reduce costs but also reinforce a culture of integrity and fairness among employees.

3. Establish Strong Internal Controls

   Clear, documented procedures can deter fraud by removing ambiguity and reducing opportunities for abuse. Recommended practices include:

   • Segregation of duties between HR, payroll, and finance functions
   • Dual review of enrollment changes and benefit approvals
   • Access limitations to benefits platforms based on role

   Standardizing approval and verification processes also reduces the risk of accidental errors being interpreted as fraud.

4. Educate Employees About Rules and Consequences

   Transparent communication helps reduce unintentional fraud and reinforces personal responsibility. Include the following in your employee education efforts:

   • Clear definitions of who qualifies as a dependent
   • Instructions for documenting life changes
   • Warnings about the consequences of knowingly providing false information (including termination or legal action)

   You can incorporate this guidance into onboarding, open enrollment materials, and your employee handbook.

5. Monitor for Red Flags

   Routine monitoring of benefits data can uncover suspicious patterns. Red flags include:

   • Sudden spikes in claims or contributions
   • Duplicate dependents across employee records
   • Coverage changes that don’t match reported life events
6. Respond Swiftly to Suspected Fraud

   If potential fraud is discovered:

   • Document the situation thoroughly
   • Involve legal counsel or compliance if necessary
   • Notify any affected carriers or vendors
   • Avoid public disclosure until facts are confirmed

   Swift, discreet action can limit further exposure and demonstrate that your organization takes fraud seriously.

Final Thoughts

Fraud prevention in benefits administration is a shared responsibility between HR, employees, and vendors. With thoughtful controls, clear communication, and regular reviews, HR professionals can reduce risk, protect plan assets, and ensure fairness for all participants. 

Benefit Allocation Systems (BAS) provides best-in-class, online solutions for: Employee Benefits Enrollment; COBRA; Flexible Spending Accounts (FSAs); Health Reimbursement Accounts (HRAs); Leave of Absence Premium Billing (LOA); Affordable Care Act Record Keeping, Compliance & IRS Reporting (ACA); Group Insurance Premium Billing; Property & Casualty Premium Billing; and Payroll Integration.

MyEnroll360 can Integrate with any insurance carrier for enrollment eligibility management (e.g., Blue Cross, Blue Shield, Aetna, United Health Care, Kaiser, CIGNA and many others), and integrate with any payroll system for enrollment deduction management (e.g., Workday, ADP, Paylocity, PayCor, UKG, and many others).

This article is for informational purposes only and is not intended as legal, tax, or benefits advice. Readers should not rely on this information for taking (or not taking) any action relating to employment, compliance, or benefits. Always consult with a qualified professional before making decisions based on this content.