In two previous posts, we reported on the rules enacted in Section 202, Division BB of the Consolidated Appropriations Act, 2021 (the “Act”) requiring the disclosure of direct and indirect compensation paid to brokers and consultants who advise group health plans. Our first post focused on the underlying statutory provision; the second post covered the highlights of Department of Labor Field Assistance Bulletin 2021-03. This post addresses the narrow question of the reporting of general agent commissions under the new rules and in light of Field Assistance Bulletin 2021-03. The question is of practical interest, and it also sheds light on the Department of Labor’s initial approach to the interpretation of the statute.
As we previously explained, Division BB of the Act broadly addresses surprise medical billing and health plan transparency. Section 202 of Division BB establishes rules governing the disclosure of direct and indirect compensation paid to brokers and consultants who advise group health plans. The Act’s broker and consultant compensation rules are modeled on similar disclosure requirements that have applied to pension plan service providers since 2012. Both rules are statutory exemptions under ERISA section 408(b)(2)(B), in the absence of which the receipt of compensation by a service provider would trigger a prohibited transaction under ERISA section 406(a).
An insurance company “general agent” is an agent with underwriting authority from an insurer. Ordinarily, producing insurance agents and brokers have no such authority. General agents, however, routinely perform certain functions ordinarily handled only by insurers, such as binding coverage, underwriting and pricing, appointing retail agents within a particular area, and settling claims. The regulation of general agents varies by state, and can encompass most lines of business and personal coverage. Most often, however, general agents are involved with placement of lines of coverage that require specialized expertise, e.g., group health insurance. Group health insurance issuers, a/k/a carriers, routinely engage and pay commissions to general agents in return for providing underwriting and other service to insurance brokers who sell group health insurance. Commissions paid to general agents are referred to as “override” commissions.
For annual reporting purposes, general agents often take the position that, because they are hired and paid by the carrier and not by the group health plan, their commissions need not be disclosed. Qualified support for this position may be found in the Instructions to Form 5500 (page 24, left hand column):
Schedule A reporting also is not required for compensation paid by the insurer to a “general agent” or “manager” for that general agent’s or manager’s management of an agency or performance of administrative functions for the insurer. For this purpose, (1) a “general agent” or “manager” does not include brokers representing insureds, and (2) payments would not be treated as paid for managing an agency or performance of administrative functions where the recipient’s eligibility for the payment or the amount of the payment is dependent or based on the value (e.g., policy amounts, premiums) of contracts or policies (or classes thereof) placed with or retained by ERISA plan(s).
In our experience, general agents tend to read clause (1) broadly and clause (2) narrowly. In Advisory Opinion 2005-02A, the Department of Labor (the “Department”) does the opposite, reading clause (1) narrowly and clause (2) broadly. Advisory Opinion 2005-02A was issued in response to alleged under-reporting of commissions and fees by insurance companies. In particular, the applicants alleged that some in the insurance industry were using language from the instructions for the Form 5500, Schedule A, to justify reporting only those payments linked directly to specific contracts or policies issued by insurance companies to ERISA-covered plans. In the Department’s view, clause (1) represents “a single, narrow exception” that covers “compensation paid by the insurance company to a ‘general agent’ or ‘manager’ for managing an agency, or for performing other administrative functions.” But, according to the Department, an insurer must report any other payment where the eligibility for or amount of such payment is based, in whole or in part, on the value (e.g., policy amounts, premiums) of contracts or policies (or classes thereof) placed with or retained by an ERISA plan, including, for example, persistency and profitability bonuses.
The Department also expressed the view in Advisory Opinion 2005-02A that non-monetary forms of compensation (prizes, trips, cruises, gifts, gift certificates, etc.) must be reported if the compensation was based, in whole or in part, on policies or contracts placed with or retained by ERISA plans. Moreover, according to the advisory opinion, reporting is required “even if premiums for the contract or policy are paid from the employer’s general assets or the policy is held in the name of the plan sponsor.” The same is true of “finder's fees and other payments made by a third party to agents or brokers” in instances in which the managing general agent makes or reimburses the payment.
Field Assistance Bulletin 2021-03
Field Assistance Bulletin 2021-03 provides guidance on the Act’s broker and consultant disclosure rules. The guidance includes a handful of important clarifications, and it also adds some welcome gloss. While the field assistance bulletin does not explicitly address the disclosure of general agent commissions, it does include the following items that can inform the subject:
- For guidance on the broker and consultant disclosure rules, look to the pension disclosure rules
The Department explains that disclosure requirements added by the Act are substantially similar to the Department’s regulation governing covered service provider disclosures to responsible plan fiduciaries of pension plans. Thus, according to the Department, “in attempting to comply with the new CAA requirements for group health plans,” covered service providers may “look to prior Departmental guidance developed for service providers of pension plans.” Doing so, says the Department, will result in the broker or consultant acting in reasonable good faith.
The Department refers expressly to pension rules issued in 2010 and 2012, the preambles to which contain extended and useful discussions that can and will inform compliance with the broker and consultant disclosure rules. The Department also acknowledges that the two provisions are not identical. General agent commissions are one instance in which this is the case: there is no good pension analog to override commissions.
The Act’s disclosure rules apply to brokers and consultants who are “covered service providers,” which generally requires that services be provided to a plan. The preamble to the 2010 pension disclosure rule understands the term to include:
(1) Fiduciary service providers, whether under ERISA or under the Investment Advisers Act of 1940; (2) service providers that will perform banking, consulting, custodial, insurance, investment advisory, investment management, recordkeeping, or third party administration services for the plan; or (3) service providers that will receive indirect compensation in connection with providing accounting, actuarial, appraisal, auditing, legal, or valuation services to the plan. (Emphasis added).
General agents do not provide services to/for the plan, at least not directly. They might, as a result, claim that they are not covered service providers. But since the broker and consultant disclosure rules reach both direct and indirect compensation, override commissions may not escape the rule’s reach. The pension disclosure rules do not appear to provide much help here.
- The reasonable good faith standard
Field Assistance Bulletin 2021-03 enunciates a temporary enforcement policy under which the Department will not treat a broker of consultant as having failed to make required disclosures “as long as the person made disclosures in accordance with a good faith, reasonable interpretation of ERISA section 408(b)(2)(B).” The Department characterizes the Act’s new disclosure obligations broadly, saying:
The statute now unambiguously requires covered service providers to disclose indirect fees and compensation. When analyzing a covered service provider’s efforts to comply with the requirements, the Department will consider whether the provider’s disclosure of information is reasonably designed and implemented to provide the required information and transparency.
Thus, it would seem that brokers and consultants might be best served by erring on the side of disclosure in close cases.
- No addition guidance is contemplated
Observing that the Act “does not require the Department to issue regulations under ERISA section 408(b)(2)(B),” the Department announced that it “does not believe that comprehensive implementing regulations are needed.” This could change, of course, and the Department does invite input as to whether particular elements of the ERISA section 408(b)(2)(B) statutory provisions would benefit from notice and comment regulations. For now, however, the disclosure of general agent overrides is something that will be guided only by the good faith standard.
We would expect that, had the Department chosen to address general agent commissions in Field Assistance Bulletin 2021-03, it would have, at a minimum, adopted the approach taken in Advisory Opinion 2005-02A. Owing to the Department’s silence, however, general agents and their advisors will need to make the call based only on the default, good faith compliance standard. In instances in which the overrides are shared with brokers and consultants, even if only in the form of rewards, trips, prizes, or gifts, etc., disclosure is required based on what appears to us to be a plain reading of the rule. Less clear is who would make the disclosure.
There are myriad ways that overrides and other commissions can be apportioned between a general agent and a producing agent or broker. More unusual arrangements will need to be analyzed under the good faith standard as well. In each case, the covered service provider must consider, among other thing, the extent to which commission overrides, or perhaps even the value of services provided in-kind, accrue to the benefit of a producing broker or agent.