The Consolidated Appropriations Act, 2021 (CAA) generally requires group health plan sponsors to request and review fee information from their plan service providers who provide brokerage services or consulting. This fee information must include both direct and indirect compensation (e.g., commissions) received by the service provider in connection with providing the services. For new contracts with these brokers and consultants (including contract renewals and extensions), plan sponsors must receive and review this fee information for reasonableness before signing. This is just one of the many new rules stemming from the CAA, as summarized in our checklist here.
Summary of the Law
We have summarized this new CAA rule in a prior article and the further guidance from the Department of Labor (DOL) in another prior article. In a nutshell, the CAA sets forth new compensation disclosure requirements that apply to service providers who provide "brokerage services" or "consulting" to group health plans subject to the Employee Retirement Income Security Act (ERISA). Similar rules regarding compensation disclosures already exist for retirement plan service providers. The CAA's definition of "brokerage services" generally relates to the more traditional concept of benefits brokers in the industry, while the "consulting" scope is intentionally broad (this has been confirmed by the DOL, as summarized in our prior article). See the chart in our other prior article that lists out CAA-covered actions relating to consulting.
The main intent of this rule is to highlight all of the indirect compensation that these covered service providers receive as a result of the services agreement, so that the plan sponsor can determine whether such compensation is reasonable when taking into account both direct and indirect fees. Indirect fees include compensation received from someone other than the plan, plan sponsor, the service provider, or the service provider's affiliates, such as commissions and referral fees as a result of the services provided to the plan.
While the CAA rule primarily focuses on the obligations of the covered service providers to make these disclosures, the rule requires the plan sponsor to take action as well. On a high level, ERISA requires plan "fiduciaries" (generally, an individual or organization that has discretion in administering or managing the plan or its assets) to ensure that plan service providers are only receiving "reasonable" fees for their services. Whether fees are considered reasonable is a facts and circumstances test.
If fees are not reasonable, this could lead to a determination that the services agreement is a "prohibited transaction" (in layman's terms, an arrangement between parties involving the plan that is disallowed by ERISA) and/or a breach of fiduciary duty, which could result in penalties, lawsuits, DOL enforcement, and other negative consequences. Practically speaking, this risk significantly increases when plan assets are used to pay the covered service provider.
Essentially, the CAA provides that fees related to a service agreement between a covered service provider and a covered plan will be treated as unreasonable as a default unless the plan fiduciary receives the CAA-required compensation disclosures ahead of signing the agreement, dutifully reviews the disclosures, and determines that such fees are reasonable.
The DOL has indicated that guidance regarding the existing retirement plan service provider compensation disclosure requirements may be relevant in answering questions about these new group health plan compensation disclosure requirements.
Action Steps
At a minimum, group health plan sponsors (subject to ERISA) should request and receive the CAA-required compensation disclosures before signing contracts, renewals, or extensions with covered service providers moving forward (this does not apply to contracts, renewals, or extensions executed before December 27, 2021). These plan sponsors should also be scrutinizing the fee information (particularly, the indirect compensation) and independently determining whether such fees are reasonable, and should then document this analysis. This is especially important when plan assets are used to compensate covered service providers. These new rules also put further emphasis on the importance of employers purchasing fiduciary insurance, developing indemnification policies for employees acting as plan fiduciaries (since ERISA fiduciaries can be held personally liable in certain circumstances), and determining which committee or individual will have the responsibility for conducting reasonable fee analyses.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.