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ML BeneBits

Since 2012, US Department of Labor (DOL) regulations under ERISA Section 408(b)(2)—a statutory exemption from the ERISA prohibited transaction provisions—have required certain service providers to employer-sponsored retirement plans to make detailed disclosures about their services and related “direct” and “indirect” compensation to a “responsible plan fiduciary” of the plan. At the time the DOL adopted this requirement, it specifically excluded health and other welfare plans. The DOL explained that while it believed welfare plan fiduciaries would benefit from guidance in this area, it recognized that the significant differences between welfare plan service arrangements and retirement plan service arrangements necessitated a tailored approach to welfare plan disclosures.

Congress has now taken the next step by including disclosure requirements for group health plan service providers in the provisions of the 2020 year-end stimulus legislation (the Consolidated Appropriations Act, 2021, Public Law No. 116-260) that deal with “surprise” billing and medical cost transparency. Specifically, Congress amended ERISA Section 408(b)(2) to impose disclosure requirements on “covered service providers” to “covered plans” as follows (separately from the use of the same terms in the existing retirement plan disclosure regulations, which are not affected by the changes):

  • “Covered plans”: Defined for purposes of these rules as group health plans—that is, employee welfare benefit plans under ERISA that provide medical care directly or through insurance, reimbursement, or otherwise—but excluding “qualified small employer health reimbursement arrangements” (certain reimbursement arrangements for employees of smaller employers that do not offer group health plans).
  • “Covered service provider”: Defined for purposes of these rules as entities that provide brokerage or consulting services to covered plans for which they reasonably expect $1,000 or more in direct or indirect compensation. These include brokerage services with respect to the selection of insurance products, recordkeeping services, medical management vendors, benefits administration, stop-loss insurance, and pharmacy benefit management services, among other things, and consulting on such matters as the development or implementation of plan design, insurance or insurance product selection, and benefits administration selection.

The new disclosure requirements become effective December 27, 2021. Because they are part of an exemption from the ERISA prohibited transaction rules, liability for failure to comply could fall primarily on the group health plan fiduciaries, not necessarily the service providers (although there are potential consequences for service providers as well). As a result, plan fiduciaries will not want (absent the availability of another exemption) to contract with brokers and consultants for their plans absent compliance with these requirements, because otherwise they could risk personal liability for the fees paid by their plans for such services.

Except for changes to accommodate the differences between retirement plan service arrangements and group health plan service arrangements, the new statutory provision very closely follows the DOL regulation’s disclosure requirements for retirement plans.

We have the following initial observations:

  • Notably, the disclosure requirement is limited to brokers and consultants—it does not apply, for example, to insurance providers or pharmacy benefit managers (PBMs). This may avoid some of the more complicated compensation disclosure issues that had caused the DOL to defer addressing the welfare plan area in 2012.
  • In many instances, group health plans are not funded through a separate trust or other pool of assets, so that the related service expenses are paid by the plan sponsor. Because plan sponsor payments are excluded from the definitions of “direct compensation” and “indirect compensation,” it would appear that a broker or consultant paid solely by the plan sponsor is not subject to this rule. However, if the broker or consultant is receiving “indirect” compensation from other sources, such as an insurance company, then the rule may apply if that compensation reaches the $1,000 threshold. This highlights what would be the underlying purpose of the disclosures—to make the plan fiduciaries aware of any potential pecuniary conflicts of interest under which the broker or consultant may be providing its services.
  • There were many questions around the disclosure of “indirect” compensation in developing compliance with the DOL regulation for retirement plan services in 2012, but ultimately the DOL provided only very limited guidance. Group health plan brokers and consultants may have similar questions, and may look to the DOL (if not to Congress) for assistance in advance of the effective date.

As a general matter, pending guidance, we would expect group health plan brokers and consultants to look to practices that have developed in the retirement plan services area as a starting point for their approach to compliance. Based on the experiences of retirement plan service providers, we would think that potentially affected firms will want to start examining well in advance of the compliance deadline whether they would be subject to this rule and, if so, what “indirect compensation” they may have to disclose, so as to anticipate any disclosure issues that may arise and be able to disseminate the required disclosures by the effective date. We stand ready to assist firms as they work through these issues.