Broker Compensation Disclosures: A Fiduciary Responsibility (Benefit Minute)

Posted in: Benefit Minute, Employee Benefits

The Consolidated Appropriations Act of 2021 (CAA) added a requirement for entities rendering brokerage or consulting services to ERISA-covered group health plans to disclose in writing to plan fiduciaries all direct and indirect compensation received for providing services to the plan. Plan fiduciaries must obtain and review this compensation information before entering into the arrangement to fulfil their fiduciary responsibility by ensuring the plan’s arrangement with the broker or consultant is reasonable based on the services being provided. The compensation disclosure must be provided when the broker or consultant reasonably expect to receive at least $1,000 in combined direct and indirect compensation. The compensation disclosure is more comprehensive than commissions and fees reported on Form 5500, and the disclosure must generally be made in advance of the plan year, while Form 5500 reporting occurs after the end of the plan year.

This requirement was already in place for service providers working with retirement plans, and the CAA expanded it to ERISA group health plans, but not life and disability plans. Covered group health plans include medical, dental and vision benefits whether fully-insured or self-funded, as well as health reimbursement arrangements, heath care FSAs, employee assistance programs and wellness programs.

For many ERISA group health plans, this requirement is currently in effect. It applies to contracts and agreements entered into or renewed on or after December 27, 2021. On an ongoing basis, the compensation disclosure should be provided in advance of a new agreement (e.g. a new broker of record) and before each renewal is finalized.

Additionally, brokers and consultants must alert the plan to any change to the compensation information as soon as practicable, but generally not later than 60 days after the change is identified, and within 90 days after a written request for the information from the plan.

Content of the Disclosure Document

The compensation disclosure document must include the following:

  • Description of services that will be provided to the plan
  • If applicable, a statement that the broker or consultant serves as a plan fiduciary (in the health plan context this generally will not apply)
  • Description of all direct and indirect compensation the broker or consultant (including any affiliate or subcontractor) expects to receive related to the services provided, including, but not limited to:
    • Fees paid by the plan
    • Commissions and producer service fees paid by insurance carriers and the identity of the insurance carrier
    • Incentive payments and other indirect compensation arrangements, and the identity of the entity paying the compensation
    • Any transaction-based compensation (e.g., finder’s fees) and the payer and payee of the compensation
    • Compensation related to the contract’s termination, including details regarding how any prepaid amounts will be calculated and refunded upon termination, if applicable
    • Conditional compensation including a description of the circumstances which may generate additional compensation and the methodologies and assumptions relied upon to calculate the compensation

The compensation disclosed may be expressed as a monetary amount, formula, a per capita charge, or in any other reasonable method.

Failure to Provide the Disclosure Document

The CAA requires brokers and consultants to provide the compensation disclosure document on their own initiative, but a plan fiduciary also has a responsibility to ensure it is received by making a written request if not timely provided. If a broker or consultant fails to make the required disclosure within 90 days after a written request, a plan fiduciary must notify the Department of Labor within 30 days and should also consider terminating the contract.

Why This Matters to Plan Fiduciaries

Under ERISA, certain transactions between a plan and a party-in-interest (which includes service providers to the plan such as brokers and consultants) are generally prohibited. However, ERISA allows plans to contract for various services as long as the service provider’s compensation is reasonable. It is the plan fiduciary’s obligation to ensure that reasonableness based on the scope of services provided. The compensation disclosure document allows the plan fiduciary to assess if no more than reasonable compensation will be paid prior to entering into the agreement.

Failure on the part of a plan fiduciary to receive the required disclosure means the contract is not reasonable in the eyes of ERISA, and the arrangement would be deemed a prohibited transaction. A prohibited transaction can result in civil penalties of up to 5% of the amount involved in the transaction. Penalties can increase to 100% of the amount involved in the transaction if appropriate correction is not made within 90 days of notice from the Department of Labor. In addition, prohibited transactions sometimes must be undone, which could require the plan fiduciary to direct the broker or consultant to repay any excess compensation to the plan. A violation of these rules could also be deemed a breach of fiduciary duty, particularly if plan assets are used to pay the broker or consultant. This could result in litigation by plan participants or the Department of Labor. ERISA also provides for civil monetary penalties for breaches of fiduciary duty equal to 20% of the amount recovered.

Given the potential personal financial risk to plan fiduciaries, they should be diligent in requesting and reviewing the compensation disclosure document in advance of any new agreement for services and before each renewal is finalized.

Another Step Towards Cost Transparency

The compensation disclosure document is another step in the effort for increased cost transparency in health plans. With proper disclosures, plan sponsors will know what services brokers and consultants perform to earn their compensation which helps ensure they are working with the right service providers.