Buried in the Consolidated Appropriations Act of 2021 (the “Act”), which is most known for its $2.3 trillion spending bill that combines $900 billion in stimulus relief for the COVID-19 pandemic, are important new rules requiring group health plan service brokers and consultants to disclose compensation that they receive in connection with services related to these plans. These new disclosure rules add a layer of transparency and are intended to provide information to the plan fiduciary to enable it to fulfill its duty to make a determination as to whether an arrangement for services is reasonable and otherwise qualifies for the applicable exception to the prohibited transaction exception.
ERISA’s prohibited transaction rules limit the types of transactions a plan can enter into with “parties in interest,” including persons providing services to the plan. The service provider exemption (section 408(b)(2) of ERISA) to the prohibited transaction rules permits a plan to pay reasonable compensation to a party in interest providing necessary services for the plan. In 2012, the U.S. Department of Labor (DOL) issued regulations under that section, but those regulations only applied to retirement plans, not health plans. The Act now amends the section 408(b)(2) statutory exemption to impose compensation disclosure requirements on health plan service providers that are similar to the requirements applicable to retirement plan service providers.
The Act’s important changes for insurance brokers and consultants in the health plan services arena are found in a section titled “Title II – Transparency, Section 202, Disclosure of direct and indirect compensation for brokers and consultants to employer-sponsored health plans and enrollees in plans on the individual market”. Under Section 202 of the Act, group health plans will be required to disclose the compensation paid to any broker or consultant that receives $1,000 or more. Furthermore, the broker or consultant will be required to make certain disclosures to the plan fiduciary, as set forth below. If the broker or consultant fails to do so, the contract will not be deemed to be "reasonable" under ERISA.
The new rules apply to any service provider that reasonably expects to receive $1,000 (adjusted for inflation) or more in direct or indirect compensation for: brokerage services provided to a group health plan with respect to its selection of insurance products, benefit administrators and record keepers, medical management vendors, disease management vendors, pharmacy benefit administration services, stop-loss insurance, wellness services, employee assistance programs, transparency tools and vendors, compliance services and group purchasing organization preferred vendor panels. They also apply to consulting services provided to a group health plan regarding the development or implementation of plan design, insurance or insurance product selection, and the selection of providers for services including: recordkeeping, benefits administration, medical management, disease management, stop loss insurance, pharmacy benefit management, wellness design and management services, employee assistance programs, transparency tools, and group purchasing organization agreements and services.
The Act also requires a covered service provider to disclose, in writing, the following information to the group health plan fiduciary:
- A description of the services to be provided to the group health plan pursuant to the consulting or brokerage services contract;
- If applicable, a statement that the broker or consultant (or its affiliate or subcontractor) expects to provide services to the plan as a fiduciary;
- A description of all direct compensation the broker or consultant (or its affiliate or subcontractor) reasonably expects to receive in connection with its anticipated services;
- A description of all indirect compensation the broker or consultant (or its affiliate or subcontractor) reasonably expects to receive in connection with its anticipated services. This includes incentive compensation paid to the broker or consultant based on a “structure of incentives not solely related to the contract with the [group health] plan;”
- If applicable, a description of how compensation is shared among the broker/consultant and its affiliates or subcontractors;
- If the broker’s or consultant’s compensation is received on a transaction basis (e.g., incentive compensation based on business placed or retained, such as commissions and finder’s fees), the information must identify the relevant services and who is paying and receiving such commissions and fees; and
- A description of termination-related fees, including (if applicable) a description of how pre-paid amounts will be calculated and refunded.
This information must be provided by the broker or consultant to the plan fiduciary reasonably in advance of the contract or arrangement being entered into, extended, or renewed. In addition, if information changes, the broker or consultant has an obligation to notify the plan fiduciary of any change to the above required disclosures as soon as practicable, but not later than 60 days from the date of knowledge of the change. If the broker/consultant fails to provide the required information, the plan fiduciary may be required to inform the Department of Labor of the failure, and to terminate the contract in order to prevent a prohibited transaction from occurring. As is the case under the 2012 retirement plan disclosure regulations, a health plan fiduciary that meets certain requirements would still satisfy the prohibited transaction exemption if the plan fiduciary relied in good faith on a broker/consultant’s disclosures that later turned out to be incomplete or inaccurate. In this case, the plan fiduciary must take reasonable steps to secure the missing or incorrect information upon, must inform the DOL, and must consider whether to terminate or continue the arrangement if the broker/consultant does not comply with a request for information within 90 days.
The new disclosure requirements set forth in the Act will apply to contracts for services executed, extended or renewed on or after December 27, 2021. Once these new rules take effect, no contract or arrangement for brokerage or consulting services will be considered reasonable unless these disclosure requirements are met.
In the next coming months, before the disclosure requirements take effect, plan sponsors and fiduciaries should be considering how these provisions may affect their vendor agreements, should start evaluating procedures for obtaining the information, and should think about how they will document their adherence to good fiduciary practice.