Avoiding the Storm of Excessive Fee Litigation: How Fiduciaries of ERISA Health Plans Can Get Ahead of the Weather

For some group health plan fiduciaries, there could be a storm brewing. Changes to the Employee Retirement Income Security Act of 1974 (“ERISA”), buried within the 5,593 pages of the Consolidated Appropriations Act, 2021 (“CAA”), create the possibility for a new set of potential plaintiffs in fiduciary litigation. The CAA amended ERISA Section 408(b)(2) to require that “covered service providers” to ERISA group health plans provide a responsible plan fiduciary with fee disclosure, similar to the annual disclosures required by certain service providers to qualified retirement plans. ERISA Section 408(b)(2) provides that a contract between a plan and a service provider is not a prohibited transaction if reasonable compensation is paid for services necessary to the plan.

In general, under the CAA, a covered service provider is any provider that contracts with a group health plan and expects to receive more than $1,000 in compensation for a wide variety of brokerage and consulting services. Fee disclosures must be provided in writing and contain a description of services under the contract, whether the services are provided in a fiduciary capacity, descriptions of all direct and indirect compensation reasonably expected for the services, along with other required information. The disclosure rules apply to all group health plan contracts entered into, renewed, or extended after December 27, 2021.

For more information on the specific contents and requirements of the disclosure rules, see Cyndi Moore’s April 2021 article, Fee Disclosures Coming for Group Health Plans.

These group health plan fee disclosure rules will provide plan fiduciaries with important information on the compensation received by plan service providers, the sources of that compensation, and the services provided. This information should help plan fiduciaries better benchmark what compensation for plan services is reasonable, as required by ERISA Section 408(b)(2), and potentially leverage the information to reduce plan costs. See Deborah Grace’s blog post from May 2022: Using The New Group Health Plan Fee Disclosure Rules To Reduce Plan Costs.

However, the disclosures could also open a new avenue for breach of fiduciary duty litigation. Over the past decade-plus, sponsors of hundreds of qualified retirement and 403(b) plans have faced litigation alleging, among other things, that the plans paid excessive fees for record-keeping and other plan services to the detriment of plan participants. This type of litigation has largely not impacted group health plan sponsors.

As group health plan sponsors consider the fee disclosures mandated by the CAA, attorneys representing plan participants will likely do so also, seeking to determine if plans have been paying excessive service fees and whether those excessive fees have been passed on to plan participants in the form of insurance premiums, service charges, or other costs. Prudent group health plan sponsors would be wise to be proactive in addressing the compliance implications of the disclosure rules.

What Can an Employer Do?

  1. Identify the proper parties who should receive the required disclosures.
  2. Ensure, or demand, if necessary, that all required disclosures from the appropriate covered service providers are received timely.
  3. If the disclosures are not received, follow the mitigation process specified in Section 408(b)(2) to avoid potential prohibited transactions.
  4. Promptly review the disclosures for the reasonableness of fees, indirect fees received by service providers, and potential conflicts of interest
  5. Compare the compensation received by service providers to those available from other providers for similar services.

Navigating the choppy waters of ERISA can be complicated. If you have any questions about these fee disclosure rules, ERISA, or any other employee benefits matters, don’t hesitate to get in touch with a member of the Employee Benefits & Executive Compensation Group at Dickinson Wright.

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About the Author

Luke Moneypenny (Associate, Columbus) focuses his practice on employee benefits and tax law. Prior to joining Dickinson Wright, Luke spent over 14 years in federal law enforcement and intelligence for the Department of Homeland Security. For more information about Luke, please click his bio or contact him at lmoneypenny@dickinsonwright.com or (614) 591-5470.