Employers of all sizes need to be aware that their group health plans will soon be receiving new fee and compensation disclosures from the health plan service providers. The Consolidated Appropriations Act, 2021 (“CAA”), signed into law by President Trump on December 27, 2020, imposes new fee disclosure requirements upon brokers and consultants to group health plans covered by the Employee Retirement Income Security Act of 1974 (“ERISA”). This insight explains what disclosures you should be expecting to be receiving from your plan’s service providers. These new disclosure rules apply to major medical/prescription drug plans, dental plans, vision plans, health flexible spending accounts, and health reimbursement arrangements.
ERISA §408(b)(2) permits group health plans to enter into reasonable plan service arrangements for reasonable compensation. The CAA amends ERISA §408(b)(2) to require certain “covered service providers” to ERISA-covered group health plans to provide written information about their fees and services to a “responsible plan fiduciary.” The purpose of these new disclosures is to give the health plan’s fiduciary sufficient information to determine whether the fees to be paid are reasonable and to assess the impact of any potential conflict of interest among the plan’s service providers. Failure to comply with the disclosure requirements means that the service arrangement is not reasonable and is possibly a prohibited transaction under ERISA.
These fee disclosure rules have been required of qualified retirement plans for some years. Specifically, the U.S. Department of Labor (“DOL”) issued regulation, 29 C.F.R. 2550.408b-2, which currently applies only to certain service providers to ERISA-covered retirement plans. Thus, some of the definitions for group health plan disclosures will be relying on the regulations issued for qualified retirement plan disclosures.
The “responsible plan fiduciary” is a plan fiduciary with authority to cause a plan to enter into, extend, or renew a contract or arrangement for plan services. Typically, the responsible plan fiduciary is either the plan sponsoring employer or a benefits committee that includes some of the employer’s executives.
A covered service provider is defined by the types of services provided and compensation received. A “covered service provider” is receiving $1,000 or more in total direct or indirect compensation from the health plan in connection with providing a “covered service” to the group health plan. Compensation received by the service provider’s affiliate or subcontractor is taken into account for purposes of applying the $1,000 minimum threshold. In general, “indirect compensation” is compensation received by a provider from a source other than the group health plan, plan sponsor or the covered service provider, while “direct compensation” is that paid by the group health plan itself. Service providers that are paid entirely by the employer, not using any plan assets, will not be subject to the new disclosure requirements.
Although we do not yet have any sample disclosures from the DOL, the service provider’s disclosure must contain a description of the services to be provided, a statement of the service provider’s fiduciary status, and a description of “compensation” received by the covered service provider for services. The term “compensation” is defined broadly to include anything of monetary value except for non-monetary compensation valued at $250 or less throughout the term of the arrangement. Regarding the service provider’s indirect compensation, the disclosure must describe: the payer of the indirect compensation; the amount (or formula or estimate) of the indirect compensation; the services for which the indirect compensation will be paid; and the arrangement between the covered service provider (or its affiliate or subcontractor), who receives the fees and the payer of the indirect compensation. The new rules make it clear that indirect compensation includes compensation paid by a vendor to a brokerage firm based on a structure of incentives not solely related to the service contract with the covered plan. Compensation that is “shared” among the covered service provider, its affiliates and subcontractors must identify each payer and recipient of such shared compensation. Finally, any compensation payable upon the termination of the contract or arrangement as well as the manner in which compensation will be received must be disclosed to the plan fiduciary.
The disclosure must be made reasonably in advance of the date that a service contract or arrangement for brokerage or consulting services is “entered into, extended or renewed.” Additionally, if the information contained in the disclosure changes over time, an update must be provided within sixty-days unless extraordinary circumstances beyond the covered service provider’s control apply, in which case the disclosure must be provided as soon as reasonably possible. The new disclosure requirements for group health plans is effective beginning on December 27, 2021, and requires disclosures relating to service contracts for covered services executed after that date. Arrangements entered into prior to that date are not subject to the disclosures unless or until a renewal occurs. Accordingly, for any new arrangement or renewal that will be effective on January 1, 2022, you may want to discuss these new disclosure requirements with your plan’s service provider before December.
Consequences of Disclosure Failures
An arrangement between an ERISA regulated health plan and a service provider can be a prohibited transaction if the services are not reasonable and necessary and the cost of said services is unreasonable. Under ERISA, the plan’s fiduciary may be held liable for any losses to the plan that result from a prohibited services arrangement. In addition, the service provider faces its own potential for liability under ERISA’s civil enforcement provisions that allow for the imposition of equitable relief against a service provider for knowingly participating in a prohibited transaction. Finally, ERISA §502(l) requires the Secretary of Labor to assess a 20% civil penalty on the amount recovered in either a settlement agreement with the DOL Secretary, or a court judgment in a case brought by the DOL, in connection with a prohibited transaction. However, a plan fiduciary can avoid liability for disclosure failures by notifying the DOL’s Secretary of the disclosure failure and considering terminating the service provider’s contract.
The new disclosure rules will not penalize a covered service provider that acts in good faith with reasonable diligence to provide an accurate disclosure even if an error or omission occurs. The DOL expects that a covered service provider will correct any such error or omission as soon as possible, but no later than 30 days after discovery of the error or omission.
Plan sponsors can begin asking brokers and consultants to provide fee disclosure whenever they enter into a new contract or a renewal for a group health plan. Obtaining and reviewing fee disclosures should be added to a plan sponsor’s annual checklist.
As mentioned above, plan sponsors also need to determine whether the fees for their group health plans are “reasonable.” For commissions on insurance products, plan sponsors are generally told that “these are standard commission levels.” Plan sponsors should be asking their consultants for similar fee benchmarking tools that exist for retirement plans but do not seem as readily available for group health plans.
Finally, as we have seen with retirement plan audits, the DOL will be requesting the group health plan’s service providers’ fee disclosures during plan audits. Plan sponsors will want to establish a process for reviewing and retaining these fee disclosures for such plan audits and having a process for determining if the plan’s fees are reasonable under ERISA.