One of the most important provisions in the 2021 Consolidated Appropriations Act (CAA) didn’t stipulate what employers must do – but rather what they must know.
On December 27, 2021, health plan sponsors were required to know how much their benefits broker or consultant makes in association with their health plan – directly and indirectly. The disclosure law applies to contracts “entered into, renewed, or extended” on or after the December 27 date for all group health plans (fully insured and self-funded alike).
This article will provide the context employers need surrounding this compensation disclosure requirement to be fully compliant with the CAA. It’ll also make the case for why this information is not only necessary but is in fact vital to understanding the value (or lack thereof) you are receiving in your benefits broker/consultant relationship.
The Short Version
All employers must receive written disclosures from their benefits broker/consultant that include all sources of compensation they receive in connection with the employer’s health plan. If the employer does not receive the information, or after reviewing it determines the compensation to be unreasonably high or implies considerable conflicts of interest, the employer must notify the DOL and terminate the contract within 90 days. Otherwise, the employer would be in violation of ERISA (the broker/consultant relationship would be considered a “prohibited transaction“).
If the employer reviews the disclosure information and deems it reasonable in light of the services the broker/consultant provides to the health plan, the employer should document this process for reference if a DOL audit were to occur down the line. Employers should also take this opportunity to focus on transparency in the broker/consultant business relationship overall – not just on compensation.
The Longer Version: Background
All insurance industries compensate their representatives largely through commission structures. This owes to insurance traditionally being a sales-oriented industry. Insurance carriers motivate their own agents through a commission to incentivize them to sell policies. And insurance brokerage firms likewise motivate their brokers to grow the block of business by paying brokers a percentage of the recurring revenue on their accounts.
Health insurance is no exception. Agents and brokers who sell individual policies receive a recurring commission that’s built directly into the health insurance premium of the policyholder. The same logic applies to many group health plans; part of the employer and employees’ premium dollars flow to the company’s benefits broker/consultant each month as a commission. That commission is typically 3-5% of the total premium.
Until recently, this was just about all employers knew about their broker/consultant’s compensation. Employers who worked with a commission-based broker/consultant had a vague idea of what that professional made through the Department of Labor (DOL)’s Form 5500, where insurance-related fees and commissions are reported publicly on an annual basis. However, many sources of broker/consultant compensation are not covered under Form 5500.
In 2019, a landmark investigative report by Marshall Allen on brokers/consultants appeared first in ProPublica before being republished by NPR. The story detailed what many benefits professionals already knew but most employers did not: Brokers/consultants are routinely compensated well beyond the nominal commission in monetary and non-monetary ways. Directly and indirectly.
A series of quotes near the beginning of the article gets the point across:
“Set sail for Bermuda,” says insurance giant Cigna, offering top-selling brokers five days at one of the island’s luxury resorts.
Health Net of California’s pitch is not subtle: A smiling woman in a business suit rides a giant $100 bill like it’s a surfboard. “Sell more, enroll more, get paid more!” In some cases, its ad says, a broker can “power up” the bonus to $150,000 per employer group.
Not to be outdone, New York’s EmblemHealth promises top-selling brokers “the chance of a lifetime”: going to bat against the retired legendary New York Yankees pitcher Mariano Rivera. In another offer, the company, which bills itself as the state’s largest nonprofit plan, focuses on cash: “The more subscribers you enroll … the bigger the payout.” Bonuses, it says, top out at $100,000 per group, and “there’s no limit to the number of bonuses you can earn.”
Such incentives sound like typical business tactics, until you understand who ends up paying for them: the employers who sign up with the insurers — and, of course, their employees . . . The commissions [and bonuses] come from the insurers. But the cost is built into the premiums the employer and employees pay for the benefit plan.Marshall Allen in “Behind the Scenes, Health Insurers Use Cash and Gifts to Sway Which Benefits Employers Choose” ProPublica, 2019
If you’re a health plan sponsor, Marshall’s full article is well worth a read. You will learn something valuable about the conflicts of interest that brokers/consultants face, and you’ll also understand why the CAA’s rules requiring full compensation disclosure are so important to you and your company.
As a manager of commingled assets (the health plan’s dollars), plan sponsors are subject to strict fiduciary duties of loyalty, care, and prudence to plan members under ERISA. Foremost among these fiduciary obligations is the obligation to pay “only reasonable [health] plan expenses.” That definitely includes brokers/consultants.
Whereas before it was nearly impossible to know what your broker/consultant truly made in connection with its services to your company’s health plan, now you must know. That’s what this law is all about: Assisting you as a plan sponsor in evaluating and verifying reasonable plan expenses.
What Does the Law Say?
The 2021 CAA amends ERISA at 408(b)(2)(B) in the following way:
[Effective December 27, 2021,] the new disclosure requirements . . . apply to persons who provide “brokerage services” or “consulting” to ERISA-covered group health plans who reasonably expect to receive $1,000 or more in direct or indirect compensation in connection with providing those services.Quote excerpted from Field Assistance Bulletin No. 2021-03. (Actual CAA amendments are granular modifications to pre-existing ERISA statutory language, which is hard to quote.)
The language the CAA uses is covered service provider. Your broker/consultant is a “covered service provider” to your health plan for the purposes of this law.* As such, they must disclose to you in writing the following:
- The services to be provided to your health plan
- Compensation that will be paid by the health plan for the services it receives
- All direct and indirect compensation the broker/consultant reasonably expects to receive in association with your account in excess of $1,000
- Identifying information about the nature and payer of those services
- Any compensation that the broker/consultant expects to receive upon contract termination, and how any prepaid amounts will be calculated and refunded.
In regard to #2 and #3 above, the CAA names 14 sources of specific compensation that brokers/consultants should include in their disclosure to you if it applies to your particular relationship:
- Development or implementation of health plan design, insurance, or insurance product selection (including vision and dental benefits).
- Medical management
- Benefits administration selection (including vision and dental benefits)
- Stop loss insurance
- Pharmacy benefit management (PBM) services
- Wellness design and management services
- Transparency tools
- Group purchasing organization (GPO) agreements and services
- Participation in and services from preferred vendor panels
- Disease management
- Compliance services
- Employee assistance programs (EAPs)
- Third party administration (TPA) services.
Note: If certain aspects of that compensation are non-monetary and would be reasonably valued at or above $250 in total across the plan year, they must disclose that compensation as well. That would include extravagant dinners, trips to the beach, and tickets to a sporting event.
* Benefits brokers/consultants are one such “covered service provider.” However, the CAA is unclear about what other entities may fall under the umbrella of providing “consulting” to group health plans. Some ERISA legal experts believe Congress intentionally left the definition of “consulting” vague so as to be understood broadly. Foley & Lardner LLP have advised consulting could “arguably capture several types of service providers, such as TPAs, PBMs, HRA/EAP administrators, wellness vendors,” etc. One thing seems certain: It’ll be unclear until further guidance arrives from DOL.
What Do Employers Need To Do?
Once you have obtained your written disclosure, you’ll need to review it on two merits:
- The reasonableness of compensation amount in light of value provided to the plan
- Conflicts of interest that may exist between your broker/consultant and best interest of your plan.
This is the part of the process that gets tricky, seeing as how the DOL does not offer any formal guidance on either front. Taking the broad view of what ERISA intends to accomplish leads us to some general yet helpful guidance for employers.
On the first point, it’s worth bearing in mind that fiduciary duty does not require plan sponsors to select lowest-cost options for service providers to plans. In fact, this would be a misinterpretation of one’s fiduciary obligations to pay reasonable plan expenses. This duty of prudence requires that fiduciaries make informed decisions by weighing pros & cons on financial & non-financial considerations to act in the best and sole “interest of plan participants and their beneficiaries.” That’s what makes decisions reasonable.
Therefore, the variable to optimize when it comes to broker/consultant compensation is the value to the plan of that relationship in light of the full cost of the services provided. Naturally, the way to accomplish this is to conduct a benchmarking assessment (or a competitive RFP if going out to market).
On the second point, the plan sponsor’s evaluation of the broker/consultant must be more qualitative. A good starting place would be to ask questions like:
- “Where is my broker/consultant making the bulk of their money?”
- “What does that say about their ability to represent my company’s interests adequately?”
- “If my broker/consultant makes more money when my health plan expenses increase, can they be my advocate? Am I being a responsible fiduciary by continuing this relationship?”
These are the type of thoughtful questions Congress intended to provoke by giving plan sponsors access to new information about their health plan’s financial interworking.
Liability and Enforcement “Need-to-Knows”
As we discussed in our analysis of the CAA’s prescription drug disclosure rule, the DOL lacks the statutory authority to regulate third parties. Hence, the liability for compliance in receiving and reviewing this information ultimately rests with you – the employer – and not the broker/consultant.
If your broker/consultant provides a disclosure that is incomplete or inadequate, then the DOL has advised they are providing “conditional relief” to all parties as long as the disclosure was made in good faith. This is not uncommon in administrative agency enforcement of new rules.
However, if your broker/consultant fails to provide a disclosure to you within 30 days of your request, then the law says you must notify the DOL and terminate the contract with that broker/consultant within 90 days following the 30-day period. Otherwise, you would be engaged in a “prohibited transaction” under ERISA.
If you fail to review the disclosed information for reasonableness OR continue a relationship with a broker/consultant who is unreasonably compensated or conflicted, the relationship would also become considered a prohibited transaction.
When an activity becomes a prohibited transaction, the company, the health plan, and/or the plan sponsor would be liable for a fiduciary breach under ERISA. The liability would either come from enforcement (fines and penalties) following a DOL audit, or from class action lawsuits brought against the plan by its own participants.
Best Practices for Employers
Compensation disclosures bring an unprecedented amount of transparency into an employer’s relationship with their broker/consultant. It is an opportunity that is long overdue and should not go to waste. Here are a few best practices for making the most of the opportunity:
- Request the disclosure be made in actual dollars & cents terms. Although the DOL does not currently require brokers/consultants to disclose actual dollar amounts, there’s no reason you can’t ask for this information. It helps clarify the relationship and brings an added layer of meaning to the disclosure. Furthermore, it makes it easier to compare their services with other brokers/consultants.
- Use the disclosure as a catalyst to discuss transparency overall. Understanding compensation is only one component of transparency in a business relationship. Ask follow-up questions and take a “while we’re on the subject” approach to examining how your broker/consultant relationship works. It’s worth pointing out that this is not only consistent with the spirit of the disclosure law, but it also may be handy to have extra information on hand in the event of a DOL audit or lawsuit.
- Think through the potential conflicts of interest your broker/consultant may have. There is a Germanic proverb dating back to the 12th century that goes: “Whose bread I eat, his song I sing.” This phrase is worth bearing in mind when you learn which entities compensate your broker/consultant. We work for who pays us. If your broker/consultant makes most of their money indirectly (not from you), what does this say about whether they are working in your best interest?
SolV’s CommittMent to Transparency and Meaningful Disclosure
For many benefits brokers and consultants, this new compensation disclosure law was disruptive and unwelcome. At SolV, we are proud that it was not burdensome for us whatsoever. We have been transparent in how we are compensated since our founding in 2016, and will continue to clearly spell out all commissions, fees, and bonuses (if applicable) that we expect to receive in association with all our services to our employer clients.
This new disclosure requirement simply allowed us to formalize how we present this information to our clients. We also used it as an opportunity to reflect on why it’s imperative to communicate clearly and openly with our clients. Employers simply deserve to know how much their partners are paid for the work they are hired to do. As Trusted Advisors, we at SolV welcome and encourage complete transparency.
This compliance overview is just that – an overview. It does not claim to be exhaustive nor should it be misconstrued as legal advice. Great effort has been put forth in ensuring the accuracy of all content, but this is no guarantee of infallibility. For official clarification or final authority, readers should solicit legal counsel.