Emily R. Langdon402.978.5386
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Under the prohibited transaction rules under the Employee Retirement Income Security Act of 1974 (“ERISA”), a plan fiduciary may retain a vendor to provide services on behalf of a plan only if no more than reasonable compensation is paid for the services. Health plan brokers and consultants often receive compensation from sources other than the plan or plan sponsor.
From a practical standpoint, this has been an issue largely overlooked in the past as related to self-funded plan sponsors and their third-party administrators.
Effective as of December 27, 2021, the Consolidated Appropriations Act of 2021 (the “CAA”) requires the disclosure of information to ensure that brokers and consultants receive no more than reasonable compensation for their services. The CAA rule applies to the following arrangements:
Compensation includes amounts that the plan or plan sponsor pays the broker or consultant directly, as well as 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:
The CAA provisions contain details about the required disclosures, especially as related to indirect compensation. The plan fiduciary may also require the broker or consultant to provide information that the fiduciary needs to comply with other ERISA requirements.
Under the CAA, compensation 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).
It is important to note that the CAA requires the plan fiduciary responsible for the relationship to compel the broker or consultant to disclose the compensation information. Penalties for noncompliance apply to the plan fiduciary, not the broker or consultant.
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 an appropriate correction is not made within 90 days of notice from the U.S. Department of Labor. Prohibited transactions generally must be undone, which generally requires the plan fiduciary to direct the broker or consultant to repay any excess compensation made to the plan.
Importantly, a violation of the CAA fiduciary 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.
It is the responsibility of plan fiduciaries to request and obtain the required information for any new relationship with a broker or consultant. Updated information must be requested upon annual renewals as well.
While the CAA rules do place additional responsibilities on ERISA plan sponsors, the provisions also provide leverage to ensure that brokers and consultants do provide the compensation information required for plan sponsors to ensure they are making appropriate decisions for the needs of the plan and plan participants.
Although the CAA rules regarding compensation information governing plan brokers and consultants took effect on December 27, 2021, many plan sponsors are either unaware of the rules or have not had sufficient training to apprise them of the required action for compliance.
In order to ensure compliance, plan sponsors should take the following actions:
Engaging ERISA counsel and a plan auditor is an excellent way to ensure compliance with not only the CAA provisions but also the plan sponsor’s fiduciary duties.
For additional information, contact Emily Langdon at firstname.lastname@example.org
This article has been prepared for general information purposes and (1) does not create or constitute an attorney-client relationship, (2) is not intended as a solicitation, (3) is not intended to convey or constitute legal advice, and (4) is not a substitute for obtaining legal advice from a qualified attorney. Always seek professional counsel prior to taking action.