The Department of Labor (Department) issued Field Assistance Bulletin No. 2021-03 (FAB) on December 30, 2021, announcing a temporary enforcement policy for group health plan service provider disclosures under ERISA Section 408(b)(2)(B).
As described in our blog post from last year, the Consolidated Appropriations Act (CAA) amended ERISA Section 408(b)(2) to require certain covered service providers of group health plans expecting to receive $1,000 or more in direct or indirect compensation to disclose specific information to a plan fiduciary about their expected direct and indirect compensation in connection with providing those services. This new disclosure requirement became effective on December 27, 2021. The goal of this new disclosure requirement is to enhance fee transparency, especially for contractual arrangements that involve the payment of indirect compensation, providing the plan fiduciary with sufficient information to assess the reasonableness of the compensation and the severity of any associated conflicts of interest.
As described in the FAB, the Department is not issuing any regulatory guidance specific to this new disclosure obligation at this time. Pending future guidance, covered service providers and plan fiduciaries are expected to implement the ERISA Section 408(b)(2) requirements using a good faith, reasonable interpretation of the law. The Department will view covered service providers looking to prior Department guidance developed for pension plans under ERISA Section 408(b)(2) as good faith. The FAB also addresses certain open questions about the disclosure requirement:
- Covered Group Health Plans: ERISA Section 408(b)(2)(B) covers insured and self-insured group health plans.
- Excepted Benefits: Excepted benefits are subject to the ERISA Section 408(b)(2)(B) disclosure requirements.
- Definition of Covered Service Providers: The term “covered service provider” is not limited to those entities who are licensed as or who market themselves as “brokers” or “consultants.” The determination of whether a service provider meets the definition of a “covered service provider” depends on the facts of the particular situation. Any service provider should be prepared if audited to explain how it concluded that it is not a covered service provider consistent with a reasonable good faith interpretation of the statute.
- Advance Disclosure of Compensation: ERISA Section 408(b)(2)(B) requires covered service providers to make the required disclosure to responsible plan fiduciaries reasonably in advance of the date they enter into a contract or arrangement with a covered group health plan. Pending further guidance, the Department clarified that disclosure of compensation in ranges may be reasonable in circumstances where future events or certain features of the arrangement could result in compensation varying within a projected range. Specifically, the Department pointed to the preamble to the Department’s final regulations for covered service provider disclosures to pension plans noting that “such ranges must be reasonable under the circumstances surrounding the service and compensation arrangement at issue.” However, the FAB cautions that more specific compensation information is preferred when it can be furnished without undue burden. The goal is to provide the responsible plan fiduciary with sufficient information about the compensation to be received by the covered service provider to allow the fiduciary to evaluate the reasonableness of the compensation and the severity of any associated conflicts of interest. Ultimately, what constitutes adequate disclosure will depend on the facts and circumstances of the contract or arrangement.
- Applicability Date: The Department clarified that only contracts or arrangements entered into, extended, or renewed on or after December 27, 2021 are required to comply with the ERISA Section 408(b)(2) disclosure requirements. The date on which a contract or arrangement is entered into between a covered service provider and a plan fiduciary will be considered the date the contract or arrangement was “executed.” For example, if a plan fiduciary entered into a new service contract with an agent on December 15, 2021, for the plan year beginning on January 1, 2022, the service contract would be treated as having been “executed” on December 15, 2021. As that is prior to the December 27 effective date, the contract would not be subject to the new compensation disclosure requirements. However, the disclosure requirements would apply if the contract were to be renewed or extended, or a new contract were executed, on or after December 27, 2021. For a “broker of record” agreement, the relevant date would, absent further guidance, be the earlier of the date the agreement is submitted to the insurance carrier or the date on which a group application is signed for insurance coverage for the following plan year.
- Small Plans: The Department clarified that the ERISA Section 408(b)(2)(B) requirement applies to both large and small group health plans. Unlike the Form 5500 Schedule C service provider disclosures, there are no exceptions for small group health plans with fewer than 100 participants.
- Future Guidance: The Department noted that it does not believe that comprehensive regulations are needed and that covered service providers and plan fiduciaries may borrow from the long-standing Department regulation governing service provider disclosures for pension plans. With that said, the Department will continue to monitor input from stake holders to determine if future guidance may be necessary.
We have been assisting clients with questions relating to these disclosure requirements. If you have any questions, feel free to reach out to your contact in our firm’s employee benefits practice.