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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 ofthe FSA Risk Reserve account 

from contract year 2004 through the transfer ofthe funds to the Office ofPersonnel 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 ofthe 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 ofPersonnel Management's (OPM) Office ofthe 

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 ofthe President, OPM implemented a Health Insurance Premium Conversion
 

Plan, 5 Code ofFederal 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 ofthe 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 ofinternal 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 ofthis data the Health Care (HC) 

FSA universe for each year was provided in four different spreadsheets (HCl through HC4 for 

purposes ofthe 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 ifthe 

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 usedthe Contract and the Federal Acquisition Regulations to detennine allowable, allocable, 

and reasonable administrative expenses charged against the Contract. 

The results ofthe 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 iftheir claims exceed their 

election. 

Our review found that SHPS incorrectly included these overpayments as part of the total 

annual FSA deficits. Overpayments ofthis 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 ofthe overpayment and provide the option ofreimbursing 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 ofthe 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 ofthe 

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 ofthe FSA Election 

Account. 

Based on our review ofSHPS's flowchart ofthe 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 ofthe 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) ofthe 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 ofthe 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. ofthe Contract, regarding outstanding 

checks, states that in the event that an FSA participant reimbursement check remains 

outstanding 180 days following the end ofthe 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 ofthe 

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 ofthe Modification 3 language regarding uncashed checks raises concerns 

about the length oftime 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 ofthe 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 ofthe 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 ofthe 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 ofthe 

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 ifmarket 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 ofthe 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 ofthe ending balance and beginning balances took into 

consideration the market cost per share to detemline the value ofthe portfolio at each 

year through the closing ofthe 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 ofour 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 

QUESTIONED COSTS 

A. CLAIM PAYMENTS 

1. Overpayments Incorrectly Identified as FSA Deficits 

2. Overpayment Recoveries Not Returned to the FSA Election Account 

TOTAL CLAIMS BENEFIT PAYMENTS QUESTIONED 

THE FEDERAL FLEXIBLE SPENDING ACCOUNT PROGRAM 

LOUISVILLE, KENTUCKY 

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

SUMMARY OF QUESTIONED COSTS
 

2004 2005 2006 2007 Total 

$0 $0 $0 $0 $0 

0 0 32,273 0 32,273 

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 $401 $200,856 $32,399 !235,323I iiii 

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.
 

Plan Year Disbursements SHPS 

Overpayment 

%of 

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.