Following is the summary of an audit by OPM’s IG of the carrier the government uses for the flexible spending account program for federal employees.
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.
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.
Investment Income not Credited to the FSAFEDS Program
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.
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.
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.
