At long last, the Department of Labor has provided guidance on interpreting requirements imposed on group health plan fiduciaries as a part of the Consolidated Appropriations Act, or CAA. On December 27, 2020, Congress amended Section 408(b)(2) of ERISA through its enactment of the CAA. Section 408(b)(2) provides a prohibited transaction exemption for transactions between plans that are subject to Title I of ERISA and “parties in interest” with respect to such plan for the provision of services that are necessary for the establishment or operation of the plan, provided that the compensation paid by the plan to the provider is “reasonable.” One requirement for compensation to be considered reasonable for purposes of Section 408(b)(2) is that the plan fiduciary receive disclosure regarding the compensation received by the service provider. Prior to the CAA, these disclosure requirements only applied to certain retirement plan service providers. However, the CAA expanded these requirements to providers of brokerage or consulting services to group health plans who expect to receive $1,000 or more in direct or indirect compensation (“Covered Providers”). In addition to disclosing the direct compensation received from a group health plan for its services, Covered Providers must also disclose indirect compensation received from third parties. The disclosure is intended to ensure that plan fiduciaries are informed as to the potential for conflicts of interests as a result of, and the reasonableness of compensation in connection with, third-party payments received by a Covered Provider. The new rules imposed by the CAA took effect on December 27, 2021.
Shortly after these provisions of the CAA took effect (and more than a year after the passage of the CAA), the Department of Labor (“DOL”) released Field Assistance Bulletin 2021-03 (the “Bulletin”) on December 30, 2021, which states that the DOL will focus its enforcement efforts on cases where Covered Providers are not acting in accordance with a good faith, reasonable interpretation of the applicable requirements of Section 408(b)(2). The Bulletin also includes guidance in the form of several questions and answers. The Bulletin confirms that while compensation arrangements relating to the provision of services to pension plans and group health plans differ in many respects, Covered Providers may look to prior DOL guidance issued with respect to pension plans (where applicable) to determine their own obligations with respect to Section 408(b)(2). As a result, the DOL states that it does not believe that comprehensive regulations are needed, but will instead monitor the situation to determine whether (and what) additional guidance may be needed.
In the Bulletin, the DOL acknowledges that Covered Providers have struggled to understand their obligations under the new requirements given the dearth of guidance or model form of disclosure for group health plans. The Bulletin provides that while there is no single method to make the required disclosure, the DOL will focus on whether a Covered Provider’s disclosure is “reasonably designed and implemented to provide” plans with the required information and transparency regarding fees. Thus, the DOL will not consider a Covered Provider to have failed to meet Section 408(b)(2)’s disclosure requirements if the Covered Provider has made disclosures in accordance with “a good faith, reasonable interpretation” of the statute. The Bulletin specifically calls out indirect compensation received from third-parties as a point of focus.
Which kinds of group health plans do the requirements apply to?
The CAA expanded Section 408(b)(2) disclosure requirements to cover all group health plans as defined in Section 733(a) of ERISA, including insured and self-insured plans, grandfathered plans, limited scope dental and vision plans and small plans with fewer than 100 participants. While certain of these plans may be exempt from other requirements for group health plans to the extent they are considered “excepted benefits”, the DOL does not view the CAA’s statutory text or legislative history as intending to exclude excepted benefits. The disclosure requirements do not, however, apply to qualified small employer health reimbursement arrangements.
Who is a broker or consultant?
The Bulletin addresses whether a group health plan service provider needs to be licensed, or market themselves as, a broker or consultant, in order to be considered a Covered Provider. The DOL’s view is that it is not dispositive whether a service provider uses the title, or is licensed as a “broker” or “consultant,” but rather whether the services provided are substantively “brokerage services” or “consulting services” as defined in the amendment to Section 408(b)(2). The DOL expects that any service provider taking the position that it is not a Covered Provider be able to explain how it reached such a conclusion under a reasonable and good faith interpretation of the CAA. The DOL also notes that while consultants traditionally were paid on a fee-for service basis and brokers received commissions, the nature of compensation received by a provider does not determine whether they are a Covered Provider.
How does a Covered Provider provide advance disclose regarding compensation that may change based on unknown variables?
Section 408(b)(2) provides that the compensation disclosure must be provided reasonably in advance of the contract or agreement between the group health plan and the Covered Provider. This requirement presents a challenge for compensation structures that depend on future events, such as benefit elections or usage rates. The Bulletin notes that Section 408(b)(2) allows for an estimate or formula to be used, and posits that depending on facts and circumstances, a range of compensation may also be appropriate. Whatever method is used, it is imperative that the plan receive sufficient information about the service provider’s compensation so that the plan fiduciary is able to evaluate the compensation for reasonableness and associated conflicts of interest. We expect this to be a continuing area of development for Covered Providers and an area in which additional guidance may be requested, given the unique compensation arrangements in place for group health plan Covered Providers (which are substantially different from those in place for those providing services to retirement plans).
Do the new disclosure requirements apply to contracts executed prior to the applicability date?
The new requirement for Covered Providers became effective one year from the CAA’s enactment (i.e., December 27, 2021). This timing was particularly onerous for Covered Providers entering into new arrangements effective January 1, 2022. The CAA provided that contracts executed prior to the applicability date would not be subject to the requirements of the statute, even if such agreement relates to services that are provided after the applicability date, but it was not clear how renewals would be treated, and many Covered Service Providers renewing arrangements in December 2021 were left wondering how to handle the disclosure requirements. The Bulletin clarifies that the date upon which a contract or arrangement is entered into is the date it was “executed.” If an agent or broker enters into an arrangement through the use of a “broker of record agreement,” the date of execution will be the earlier of the date on which the agreement is submitted to the insurance carrier or the date on which the application is signed for insurance coverage for the following plan year (provided the submission or signature is not delayed to avoid disclosure obligations under Section 408(b)(2)).
Action Items. Group health plan fiduciaries and plan sponsors should expect to receive disclosures from Covered Providers for their group health plans and, if not provided for arrangements that were new or renewed on or after December 27, 2021, should request disclosures in compliance with Section 408(b)(2). These disclosures should be reviewed to determine whether they comply with Section 408(b)(2) and as well as to review reasonableness of the fees set forth in the disclosure.
 Section 408(b)(2)(B)(ii)(I)(bb)(AA) and (BB) define brokerage services as services “with respect to selection of insurance products (including vision and dental), recordkeeping services, medical management vendor, benefits administration (including vision and dental), stop-loss insurance, pharmacy benefit management services, wellness services, transparency tools and vendors, group purchasing organization preferred vendor panels, disease management vendors and products, compliance services, employee assistance programs, or third party administration services” and consulting services as those services relating to “related to the development or implementation of plan design, insurance or insurance product selection (including vision and dental), recordkeeping, medical management, benefits administration selection (including vision and dental), stop-loss insurance, pharmacy benefit management services, wellness design and management services, transparency tools, group purchasing organization agreements and services, participation in and services from preferred vendor panels, disease management, compliance services, employee assistance programs, or third party administration services.”