The Consolidated Appropriations Act, 2021 (CAA) requires the disclosure of information to ensure that brokers and certain consultants receive no more than reasonable compensation for their services.
This is the fourth briefing in Ballard Spahr’s series on the Consolidated Appropriations Act, 2021 (CAA) and transparency regulations. It was originally was published in November 2021.
The first installment of the series addressed the new No Surprises Rules.
The second focused on Understanding the Mental Health Parity and Addiction Equity Act.
The third was Understanding the New Health Care Transparency Requirements.
Brokers and certain consultants must disclose to the plan fiduciary a description of their services and a description of all direct and indirect compensation they expect to receive in connection with their services.
The rules will require the plan fiduciary responsible for the relationship to require the broker or consultant to disclose this information.
Fiduciaries would do well to evaluate the reasonableness of compensation that is paid in ongoing broker and consultant relationships.
The Bottom Line
The new rules apply to broker and applicable consultant contracts entered into, extended, or renewed on or after December 27, 2021. A violation of these rules could be deemed a breach of fiduciary duty, particularly if plan assets are used to pay the broker or consultant. Although every regulatory requirement carries with it administrative burdens, these new rules may provide plan fiduciaries with enhanced leverage in the selection of insurance products, negotiation with plan vendors, and other matters of great significance to a plan. Lawyers at Ballard Spahr are prepared to respond to your questions.
Background. Under the prohibited transaction rules of the Employee Retirement Income Security Act of 1974, as amended (ERISA), a plan fiduciary may engage a vendor to furnish services on behalf of a plan only if no more than reasonable compensation is paid for the services. Brokers and consultants to a health plan often receive compensation from sources other than the plan or plan sponsor.
New Rule. The Consolidated Appropriations Act, 2021 (CAA) requires the disclosure of information to ensure that brokers and consultants receive no more than reasonable compensation for their services. The rule applies to arrangements with:
- Brokers who provide services for the selection of health insurance products (including dental and vision insurance) and a wide range of other plan administrative services and programs, including third-party administrative services, pharmacy benefit management, stop-loss insurance, wellness programs, employee assistance programs, and recordkeeping; and
- Consultants who provide services that would subject a broker to the new rules or services related to the development and implementation of plan designs.
Compensation includes amounts that the plan or plan sponsor pays the broker or consultant directly and amounts that the broker or consultant receives from other sources in connection with their services provided to the plan. This includes non-monetary compensation with a value of at least $250.
Brokers and consultants must disclose to the plan fiduciary responsible for the relationship a description of their services (including when the broker or consultant will act as a fiduciary, if applicable), a description of all direct and indirect compensation they expect to receive in connection with their services (including certain details about their arrangements with other sources of payment), and certain information about their financial arrangements with affiliates and subcontractors. The rules contain details about these disclosures, particularly with regard to indirect compensation. The plan fiduciary may also require the broker or consultant to provide information that the fiduciary needs to comply with other requirements under ERISA.
This information must be provided reasonably in advance of the date that a contract is executed, extended, or renewed, and the information must be updated within 60 days of any change (absent extraordinary circumstances).
Although couched largely in terms of what the broker or consultant must disclose, the rules will require the plan fiduciary responsible for the relationship to require the broker or consultant to disclose this information. The rules specify actions that the fiduciary must take if it knows of a failure by a broker or consultant to make an appropriate disclosure. As is the case with similar rules applicable to retirement plans, the penalties for compliance failures are on the plan fiduciary, not the broker or consultant.
Citation. ERISA section 408(b)(2).
Effective Date. The new rules will apply to plans as of December 27, 2021. A special transitional rule provides that the rules do not apply to contracts with brokers and consultants executed prior to that date (but see below).
Enforcement. Under ERISA, a prohibited transaction can result in civil penalties of up to 5 percent of the amount involved in the transaction. Penalties can increase to 100 percent of the amount involved in the transaction if appropriate correction is not made within 90 days of notice from the U.S. Department of Labor. In addition, prohibited transactions generally must be unwound, which likely would require the fiduciary to direct the broker or consultant to repay any excess compensation to the plan. A violation of these rules could also be deemed a breach of fiduciary duty, particularly if plan assets are used to pay the broker or consultant. This could result in litigation by plan participants or the U.S. Department of Labor. ERISA also provides for civil penalties for breaches of fiduciary duty equal to 20 percent of the amount recovered.
Plan Considerations. Plan fiduciaries must request and obtain the required information for any new relationship with a broker or consultant. This should include any renewal of a relationship and, we believe, any new matter for which an existing broker or consultant is engaged. Although the new rules technically do not reach contracts executed before the effective date, the new rules establish standards that, in substance, are no less applicable to existing relationships. Thus, fiduciaries would do well to evaluate the reasonableness of compensation that is paid in ongoing broker and consultant relationships to gain assurance that the advice that they are receiving from their brokers and consultants is fully in the interest of their plans and participants and beneficiaries.
Plan fiduciaries will also need to consider how they will make proper use of the information once they receive it. Employers may wish to draw on their experience in responding to fiduciary requirements imposed on them with regard to vendors under their 401(k) and other retirement plans and consider whether it is sensible to delegate responsibility for selecting and monitoring broker and consultant relationships to a particular committee or individual.
Although every regulatory requirement carries with it administrative burdens, plan fiduciaries may view these new requirements as providing them with significantly enhanced leverage to obtain information that will better enable the plan fiduciaries to fulfill their responsibilities with respect to the selection of insurance products, plan vendors, and other matters of great significance to a plan.
Recommended Steps. Plan fiduciaries should consider taking the following actions:
- Identifying the brokers and consultants who are subject to the new rules.
- Identifying and assigning internal responsibility for soliciting and evaluating required information from brokers and consultants.
- Introducing contractual obligations on brokers and consultants to provide the required information (this is particularly urgent for new, renewed, and extended arrangements).
- Setting deadlines for the provision of the required information.
- Developing the means to evaluate the information received, both in terms of completeness and relevance and in terms of the reasonableness of the total compensation that the broker or consultant receives. This may require seeking additional assistance or access to data that allows for benchmarking the information.
- Assessing whether the compensation is, in fact, reasonable and whether the information provided presents any other concerns that need to be investigated or further addressed with the broker or consultant.
- Properly documenting the fiduciary’s assessment of the reasonableness of the compensation.
- Considering how the information and evaluation affect the relationship with the applicable broker or consultant.
Lawyers at Ballard Spahr are working with the new rules and are prepared to assist you with questions that you may have.
Please contact Edward Leeds or Paige Haughton.
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