The Consolidated Appropriations Act, 2021, amended the Employer Retirement Income Security Act (ERISA) to require persons providing “brokerage services” or “consulting” to ERISA-covered group health plans to disclose detailed information to plan fiduciaries about the compensation they are to receive in connection with such services.
Similar disclosure requirements have applied to ERISA-governed retirement plan service providers since 2012.
The gist of the new disclosures is to require that covered brokers and consultants provide certain plan fiduciaries with the information necessary to:
- Assess the reasonableness of the compensation to be received.
- Identify potential conflicts of interest relative to a broker or consultant’s receipt of indirect compensation from sources other than the plan or plan sponsor.
As explained by the Department of Labor’s (DOL’s) Employee Benefits Security Administration (EBSA), because the new disclosures are aimed at helping plan fiduciaries guard against potentially unknown conflicts of interest, it focuses heavily on identifying broker and consultant compensation received from third parties (i.e., “indirect compensation”). However, the new disclosures apply to virtually all forms of group health plan broker and consultant service compensation.
Importantly, the new disclosures do not apply to broker or consultant arrangements where compensation is paid exclusively from the plan sponsor’s general assets or where direct or indirect compensation is reasonably expected to be less than $1,000.
Implications for Plan Fiduciaries
While the new disclosures make it the responsibility of brokers and consultants to provide plan fiduciaries with the required information, the consequences of noncompliance directly impact plan fiduciaries.
Where a service provider fails to make the required disclosure, the new disclosures require that fiduciaries make a written request to the service provider. If the disclosure is not provided within 90 days of the written request, fiduciaries have 30 days to report the service provider’s failure to the DOL.
Failure to comply with the new disclosure requirements means that the service provider arrangement is not reasonable under ERISA section 406(b)(2) and, as a result, is not eligible for the prohibited transaction exemption.
A prohibited transaction exposes plan fiduciaries to direct liability for any losses to the plan, potentially including a mandatory 20 percent civil penalty imposed on the “amount involved” pursuant to ERISA section 502(l). It is helpful that some protection is afforded to plan fiduciaries who become aware of noncompliance and satisfy the conditions set forth in the new disclosure requirements.
Prudent plan fiduciaries will establish and adhere to a formal, written policy to ensure compliance with the new disclosures. Indemnification and limitation of liability provisions in service provider contracts should also be revisited relative to this new rule.
Effective Date and Enforcement
The new disclosures became effective on Dec. 27, 2021, with respect to covered service contracts executed on or after that date. Importantly, preexisting service arrangements are not subject to the new disclosures until a contract renewal or extension occurs.
While the DOL has no immediate plans for issuing implementing regulations, on Dec. 30, 2021, EBSA released Field Assistance Bulletin (FAB) 2021-03, announcing a temporary enforcement policy as to the new disclosures. The FAB guidance includes Q&As intended to assist plan fiduciaries and service providers in understanding the DOL’s view regarding what constitutes a reasonable, good faith interpretation of the new disclosures. Key compliance issues addressed in the Q&As include confirmation that:
- The new disclosures apply to both insured and self-insured group health plans, including limited scope dental and vision only plans (i.e., “excepted benefits” aren’t excepted for this purpose).
- No small plan exception exists for fully insured plans covering fewer than 100 participants.
- Where a “broker of record” (BOR) agreement is involved, the date the contract or arrangement will be considered effective for purposes of the new disclosures are the earlier of (i) the date the BOR agreement is submitted to the carrier, or (ii) the date on which a group application is signed for the following plan year.
The FAB also provides clarifying guidance regarding determining whether a group health plan service provider is covered by the new disclosures and addresses disclosure of compensation under arrangements where the exact compensation amount cannot reasonably be known in advance.
Group health plan fiduciaries and their service providers should review the FAB for these and other important insights in implementing the new disclosures.
In Closing
The DOL’s group health plan enforcement actions are on the rise, as are ERISA class actions and other costly litigation involving group health plans. While the new disclosures require immediate attention from affected group health plans and their covered service providers, it also serves as a good reminder of the host of fiduciary requirements that attach to health and welfare plan arrangements under ERISA, including ERSA’s prohibited transaction rules.
Plan fiduciaries should use this reminder as an opportunity to review group health plan governance, policies and practices with an eye toward compliance with ERISA’s fiduciary rules and the avoidance of costly violations.
Randie Thompson is director of compliance consulting at HR advisory firm Buck. Laurie S. DuChateau is U.S. compliance consulting practice leader at Buck. © 2022 Buck Global LLC. All rights reserved. Republished with permission.
Related SHRM Article:
Fee Disclosure Requirements for Health Plan Advisors Shed Light on Conflicts, SHRM Online, January 2022