Like a 401(k) plan, a group health plan must comply with ERISA’s rule that prohibits a plan fiduciary from paying more than a reasonable amount for services provided to the plan. When a group health plan offers insured benefits, service providers may receive a commission from the insurance company instead of direct payment from the plan sponsor or group health plan. Such a financial arrangement makes it difficult for the plan fiduciary to know what it has paid for the advisor’s services.
With the enactment of the Consolidated Appropriations Act, 2021 (CAA), a plan fiduciary will have easier access to information about these forms of indirect compensation. The CAA amended section 408(b)(2) of ERISA to require certain service providers to group health plans to disclose specified information to a responsible plan fiduciary about the direct and indirect compensation that the service provider expects to receive in connection with its plan services. Under the CAA, any service provider who expects to receive $1,000 or more in direct or indirect compensation in connection with providing brokerage or consulting services must disclose to the ERISA fiduciary the amount paid to the advisor with a description of the services being provided.
In terms of timing, the new rule is effective now for new contracts executed on or after December 27, 2021, or for any contract renewed or extended after that date. My partner, Cyndi Moore, previously wrote about the changes contained in the CAA. Her article from April 2021 is found here: https://www.dickinson-wright.com/news-alerts/moore-fee-disclosures-coming
On December 31, 2021, the Department of Labor (DOL) issued Field Assistance Bulletin No. 2021-03, providing guidance on the new disclosure rule. In the Bulletin, the DOL confirmed that any service provider who provides certain services associated with the selection of insurance products or who provides services related to the development or implementation of plan design must provide the disclosure, even if the service provider does not call itself a broker or consultant. In addition, the disclosure must be provided to a group health plan even if it has less than 100 participants and all benefits are insured.
Acknowledging that diverse service and compensation structures exist in the group health plan marketplace, the DOL refrained from requiring a set format for the disclosure. To that end, a service provider may describe the compensation as a monetary amount, a formula, a per capita charge for each enrollee, or by any other reasonable method and still satisfy the DOL’s requirements. The DOL cautioned service providers that more specific compensation information is preferred. The principal objective of the new provision is to provide the plan fiduciary with sufficient information about the compensation to be received. This allows the fiduciary to evaluate the reasonableness of the compensation and the severity of any associated conflicts of interest.
Any company that offers group health, dental or vision coverage to employees sponsors a group health plan; individuals at the company that select the coverages offered to employees are ERISA fiduciaries. Those fiduciaries are responsible for confirming that they have received the required disclosures, and in determining if the compensation is reasonable based on the services being provided. Since there are no third-party entities that benchmark fees charged by service providers to group health plans, a prudent fiduciary may want to request a proposal from other potential service providers to better understand what others in the market charge for the services, or ask its current service provider what it would charge for its services if the indirect compensation was eliminated. Service providers may also receive indirect compensation from other group benefits such as life, disability, or supplemental insurance. As such, a prudent ERISA fiduciary should obtain information about that compensation when determining the reasonableness of what is paid. Critically, because it is the company that traditionally pays the cost of these coverages, a prudent fiduciary may be able to use the information in these disclosures to reduce the company’s cost of coverage.
About the Author:
Deborah Grace is a Member of Dickinson Wright’s Troy office, where she advises business owners, human resources professionals, and plan fiduciaries on the complex laws that impact the design and administration of their retirement and welfare benefit plans. She has extensive experience advising clients on the employee benefits aspects of business transactions and fixing inadvertent errors in plan administration. Deborah can be reached at 248-433-7217 or firstname.lastname@example.org and you can visit her bio here.