This is something you SHOULD be paying attention to. Your benefits cost is your second highest expense next to payroll.
Compensation to your broker/consultant is buried in your costs. Take out the fat without reducing the benefits offering. Full transparency is something each one of you is asking for - from targets, from due diligence and your benefits program is not different.
The more you know, the better picture you have to take out unnecessary expenses.
WE have always done what is being put into place. The newly required revealed information will take a lot of employers by surprise. Don't be surprised. You need to know.
Last year’s Consolidated Appropriations Act of###-###-#### CAA) requires most brokers and consultants providing services to ERISA-covered group health plans to disclose to plan fiduciaries (typically, the plan sponsor), in writing, any and all direct or indirect compensation they receive for providing services to the plan. In turn, those fiduciaries must obtain and review this compensation information to ensure the plan’s arrangement with the broker or consultant is “reasonable.”
The disclosure requirement applies to contracts and agreements entered into or renewed (i.e., extended) on or after Dec. 27, 2021, so we suspect plan sponsors will begin receiving these disclosures over the next several weeks. Here is what you need to know.
Once the disclosures are received, plan sponsors will want to review the disclosure to ensure they understand the information provided. With respect to Lockton’s disclosures, we will be pleased to answer any questions you may have about them.
Who is required to provide the disclosure? Service providers (and their affiliates or subcontractors) providing brokerage or consulting services to ERISA-governed group health plans are subject to the new disclosure requirements if they reasonably expect to receive at least $1,000 in direct or indirect compensation for those services. The law defines brokerage and consulting services quite broadly to include the following:
Selection of insurance products (including dental and vision)
Stop loss insurance
Pharmacy benefit management services, including services provided to a pharmacy benefit coalition
Transparency tools and vendors
Group purchasing organization preferred vendor panels
Disease management vendors and products
Employee assistance programs
Third-party administration services
Development or implementation of plan design
Note, the new disclosures are required from brokers and consultants who provide services to group health plans. The broad definition includes major medical plans, vision plans, dental plans, health reimbursement arrangements and flexible spending accounts.
The disclosures are not required for welfare plans that do not provide healthcare, such as life and disability plans.
What information is included in the disclosure? The law requires brokers and consultants who reasonably expect to receive at least $1,000 in direct and indirect compensation for the services supplied to the plan to disclose any direct, indirect and transaction-based compensation, including non-cash compensation, of $250 or more for those services, as well as a description of the services resulting in the payment.
This is a broad range of compensation that will be subject to disclosure. Note that some broker/consultant compensation information is already reported on various schedules included with the plan’s annual Form 5500 filing. However, this new disclosure obligation encompasses much more information.
The disclosure to the responsible plan fiduciary must contain at least the following information:
Description of services that will be provided to the plan
A statement as to whether the service provider serves or will serve as a plan fiduciary (in the health plan context this rarely applies)
Description of all direct and indirect compensation the service provider receives or expects to receive related to the services provided to the plan, including, but not limited to:
Fees paid by the plan (fees paid with employer money, from the employer’s general asset account, seem to fall outside the disclosure obligation but of course the employer should know about these payments in any event)
Incentive payments and other indirect compensation arrangements, and the identity of the entity paying the compensation and the services performed triggering the compensation
Any transaction-based compensation (e.g., commissions, 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 for each enrollee, or in any other reasonable method.
Some types of compensation (e.g., persistency bonuses), as well as the specific amount of the compensation, might depend on the service provider meeting certain requirements and thus not easily expressed as a flat amount. In those instances, a range or formula might be the appropriate method of disclosure.
When must the disclosure be made? As noted above, the disclosure requirement takes effect on Dec. 27, 2021, and service providers must provide the compensation disclosure in advance of entering into, amending or extending the contract for services (on or after that date) so that the plan fiduciary may review it to determine if compensation is reasonable, prior to the effective date of the contract, renewal or extension.
Additionally, service providers must alert the plan to any change to the compensation information as soon as practicable, but generally not later than 60 days after the service provider identifies the change and within 90 days after a written request for the information from the plan.
Why does this matter? 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. But to allow a plan to do what it needs to do, ERISA allows plans to contract for various services as long as the contracts are reasonable. It is the plan fiduciaries’ obligation to ensure that reasonableness.
Unless a plan sponsor designates the plan’s fiduciaries (such as members of a benefits committee), the members of the sponsor’s board of directors are the plan’s default fiduciaries. This is usually surprising news to the sponsor’s directors.
This new obligation for brokers and consultants to disclose their direct – and more importantly, indirect – compensation, and for fiduciaries to obtain that information, allows the fiduciaries to determine whether the contract, including the compensation paid, is reasonable. Failure on the part of plan fiduciaries 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.
Under ERISA, if the plan engages in a prohibited transaction, the plan’s fiduciaries could be liable for any losses to the plan resulting from the arrangement and could be subject to a 20% penalty on any amounts recovered in connection with the prohibited transaction. Plainly speaking, there is a financial risk to the plan’s fiduciaries if they do not receive the disclosure.
What if our broker/consultant doesn’t provide the information? Service providers are required to provide the disclosure on their own initiative, but in the event they do not, and fail to make the required disclosures within 90 days after a written request for it, the plan fiduciary must notify the Department of Labor (DOL) within 30 days and should consider terminating the contract.