Broker and Consultant Disclosures to Group Health Plans under Division BB of the Consolidated Appropriations Act, 2021
Division BB of the Consolidated Appropriations Act, 2021 (“Act”) broadly addresses surprise medical billing and health plan transparency. This post focuses on Section 202 of Division BB (the “Provision”), which establishes rules governing the disclosure of direct and indirect compensation paid to brokers and consultants who advise group health plans. The Provision applies to contracts or arrangements executed or entered into on or after December 27, 2021. (Separate rules governing the disclosure of broker and consultant compensation in the individual insurance market are not covered in this post.)
The Provision requires “covered service providers” to disclose their “direct” and “indirect” compensation received during the term of the contract or arrangement to a “responsible plan fiduciary” of a “covered health plan.” A “responsible plan fiduciary” means a fiduciary with authority to cause the covered plan to enter into, or extend or renew, the contract or arrangement. Absent an express delegation of authority, a plan sponsor’s board of directors, LLC member(s), or partners are the default responsible plan fiduciary. In the retirement plan context, delegation is routinely made to a fiduciary committee. Some sponsors follow this approach for welfare plans, a practice that we expect will become more commonplace as a result of the Act’s transparency rules.
A “covered service provider” means a “service provider that enters into a contract or arrangement with the covered plan and reasonably expects $1,000 (or such other amount as may be established in regulations) or more in compensation, direct or indirect, to be received in connection with providing brokerage or consulting services.” The requirement is written broadly to include services performed by affiliates and subcontractors. A “covered plan” means and refers to an ERISA-governed group health plan. The term includes major medical plans, vision plans, dental plans, health reimbursement arrangements and flexible spending accounts but not qualified small employer health reimbursement arrangements (QSEHRAs). Disclosures are not required for welfare plans that do not provide healthcare, such as life and disability plans.
- Brokerage services include the selection of insurance products (including vision and dental), recordkeeping services, medical management vendor, benefits administration (including vision and dental), stop-loss insurance, pharmacy benefit management services, wellness services, transparency tools and vendors, group purchasing organization preferred vendor panels, disease management vendors and products, compliance services, employee assistance programs, or third party administration services.
- Consulting services include those related to the development or implementation of plan design, insurance or insurance product selection (including vision and dental), recordkeeping, medical management, benefits administration selection (including vision and dental), stop-loss insurance, pharmacy benefit management services, wellness design and management services, transparency tools, group purchasing organization agreements and services, participation in and services from preferred vendor panels, disease management, compliance services, employee assistance programs, or third party administration services.
The Provision amends ERISA Section 408(b)(2) to make these disclosures a part of the “service provider” exemption to the ERISA prohibited transactions rules. In general, the prohibited transaction and self-dealing rules in ERISA § 406 prohibit fiduciaries from engaging in transactions with certain parties in interest/disqualified persons, which include service providers. Transactions prohibited by these rules include the payment of compensation to parties in interest—which brokers and consultants are. ERISA § 408(b)(2) furnishes a statutory exemption from the prohibited transaction rule that covers “any contract, or reasonable arrangement, made with a disqualified person for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefore”. It is this service provider exemption that brokers and consultants and other plan service providers rely on when they conduct business with ERISA-covered plans. The Provision makes the new broker and consultant disclosure obligations a requirement that must be satisfied in order to qualify for the service provider exemption.
Under the Provision, brokers and consultants must make the following disclosures:
- A description of the services to be provided to the covered plan under pursuant to the contract or arrangement;
- If applicable, a statement that to the effect that the covered service provider, an affiliate, or a subcontractor will provide, or reasonably expects to provide, services pursuant to the contract or arrangement directly to the covered plan as a fiduciary;
- A description of all direct compensation, either in the aggregate or by service that the covered service provider, an affiliate, or a subcontractor reasonably expects to receive in connection with the covered services;
- A description of all indirect compensation that the covered service provider, an affiliate, or a subcontractor reasonably expects to receive in connection with the services, including compensation from a vendor to a brokerage firm based on a structure of incentives not solely related to the contract with the covered plan but excluding compensation received by an employee from an employer on account of work performed by the employee;
- A description of the arrangement between the payer and the covered service provider, an affiliate, or a subcontractor, as applicable, pursuant to which such indirect compensation is paid;
- Identification of the services for which the indirect compensation will be received, if applicable;
- Identification of the payer of the indirect compensation;
- A description of any compensation that will be paid among the covered service provider, an affiliate, or a subcontractor, in connection with the services, if set on a transaction basis (e.g., commissions, finder’s fees), including identification of the services and the payers and recipients; and
- A description of any compensation that the covered service provider, an affiliate, or a subcontractor reasonably expects to receive in connection with termination of the contract or arrangement, and how any prepaid amounts will be calculated and refunded upon termination.
Covered service providers must furnish this information in advance of the date on which the contract or arrangement is entered into, extended or renewed. Any changes in the required disclosures must be communicated in writing as soon as practicable, but generally not later than 60 days from the date on which the covered service provider is informed of the change. This 60-day period is extended in the case of extraordinary circumstances (i.e., those beyond the covered service provider's control) in which case the information must be disclosed as soon as practicable. Plan fiduciaries may also request from the covered service any other information relating to the compensation received in connection with the contract or arrangement that is required for the covered plan to comply with applicable reporting requirements.
A contract or arrangement will not fail to be reasonable if the covered service provider makes an error or omission in the required disclosure if the covered service provider was acting in good faith and with reasonable diligence and discloses the correct information to the responsible plan fiduciary as soon as practicable, but not later than 30 days after the date on which the covered service provider knows of such error or omission. Nor will a violation be deemed to occur despite the failure by a covered service provider to disclose information if the responsible plan fiduciary was unaware that the covered service provider failed or would fail to make required disclosures and reasonably believed that the proper disclosures would be timely made, if the fiduciary makes a written demand for the information. If the information is not provided within 90 days, the fiduciary must notify the Department of Labor. The fiduciary must also determine whether to terminate the arrangement.
The Provision’s requirements are modeled on and track closely the 2010 final Department of Labor regulations requiring that certain service providers to ERISA-covered retirement plans disclose information to plan fiduciaries to enable the fiduciaries to determine the reasonableness of contracts or arrangements that they enter into, and in particular, the reasonableness of the service providers’ compensation and the conflicts of interest that may affect the service providers’ performance of services.
While some compensation paid to brokers and consultants must be disclosed under current law on schedules to Form 5500, the Provision’s disclosure obligations are far broader. Further, even though the Provision applies to group health plans, it is not yet clear whether the rule applies to only where there are ERISA plan assets. Prohibited transactions, after all, involve plan assets. If a group health plan is funded by a trust, then there will in all likelihood be plan assets. But what if (as in commonly the case) there is no trust? Participant contributions are plan assets, which ordinarily must be held in trust. Under a Department of Labor non-enforcement policy, if the sole reason that a plan would be considered funded (and therefore need a trust) is the presence of participant contributions under a cafeteria plan, the plan will be deemed to be unfunded for trust purposes. Of course, this does not mean that there are no plan assets. We therefore anticipate that plans that are not funded by a trust will nevertheless be covered by the Provision.
While the Provision imposes a series of procedural requirements, it is compliance with the substance of Provision that is currently top of mind for the brokers and consultants we encounter: what must be disclosed, exactly, when, and what form must the disclosure take? The following is a non-exclusive list if the types of direct and indirect compensation covered by the Provision:
- All manner of commissions, including per-member-per-month fees
- Service fees for assistance in selecting, placing, and administering coverage under a consulting agreement with the plan
- Transaction compensation (e.g., per claim, per visit, per prescription, per person, etc.)
- Retention and new sales bonuses
- Contingent compensation (e.g., for growth target, volume target, or other specified goals)
- Overrides, including general agent fees
- Non-Cash compensation (e.g., meals, entertainment, gifts, or reward trips)
Where it is not possible to determine compensation in advance of entering into a contract of arrangement, use of a formula to disclose the compensation is permitted, provided it allows the plan fiduciary to assess the reasonableness of the compensation.
Bonuses and commission overrides are not separately identified in the text of the Provision. Nevertheless, we expect these and other compensation practices will be subject to the rule once guidance is issued. Similarly, we anticipate that tiered and/or fluid commission rates—e.g., where a carrier determines a rate by the broker’s block size and adjusts the tier quarterly—will also need to be disclosed. The challenges that the Provisions present to these and other compensation practices are explained at length in a comment submitted by the National Association of Heath Underwriters, available here.
Failure to comply with the Provision triggers one or more ERISA prohibited transaction provisions, which subjects both the covered service provider and the plan fiduciary to penalties or other unwelcome consequences. In general, plan fiduciaries are liable for losses to a plan that result from the prohibited services arrangement. Brokers and consultants, in their capacity as service providers, are subject to penalties under the ERISA civil enforcement provisions that impose liability where a service provider knowingly participates in a prohibited transaction. There is also separate provision under which the Secretary of Labor may seek to impose civil penalties against a service provider who engages in a prohibited transaction. The Secretary of Labor is also required to assess an additional 20% penalty on the amount recovered either by way of settlement or a court judgment.
The Provision applies to contracts or arrangements executed or entered into on or after December 27, 2021. Absent guidance, whether or how these rules will affect extensions or renewals of existing arrangements is not yet known. In this regard, in a final regulation issued September 17 of this year that addressed the broker and consultant disclosures in the individual market, the Department of Health and Human Services offered a transition rule delaying the effective compliance date such that the new requirements would not apply to commissions and other amounts paid to agents and brokers under a contract executed with an issuer prior to December 27, 2021, unless the contract was amended or renewed. Whether the Department of Labor will take the same approach with these rules remains to be seen.
Under a plain reading of the statute, contracts governing 2022 renewals of group health plans with calendar year plan years would appear exempt from the new rules. Presumably, these renewals were in place before December 27, 2021. In contrast, absent some relief, renewals of contracts governing plans with non-calendar plan years commencing in 2022 will need to comply. Less clear is how the Provision will apply to existing evergreen arrangements, such as broker-of-record letters. It would not surprise us if implementing regulations require some manner of periodic (e.g., annual) disclosure. Implementing regulations will also need to flesh out what constitutes disclosure. We doubt for example that merely posting to a broker or consultant’s website will suffice. A fee agreement appears itself to be a disclosure, however.
For now the law is clear: brokers and consultants need to be prepared to comply with the Provision on relatively short order. That said, owing to the delay in the issuance of guidance, it would not be unreasonable to anticipate some sort of grace period or other relief to provide time to enable covered service providers to come into compliance.