Quick Look: The Consolidated Appropriations Act of 2021 introduced new compensation regulations for brokers and consultants. These trusted advisers, as well as subcontractors, will now be required to disclose their compensation to their employer clients. The goal is complete transparency to allow employers to better understand broker incentives and gauge potential conflicts of interest. The new regulations go into effect December 27, 2021, so brokers must begin to prepare.
Last year’s Consolidated Appropriations Act (CAA) of 2021 requires most brokers and consultants providing services to ERISA-covered group health plans to disclose to their employer clients, also known as plan sponsors, all direct or indirect compensation they expect to receive for providing services. It’s important to note that brokers will be releasing these numbers to their clients only, not a government agency.
The law also requires the disclosure be given prior to the beginning of a plan year, and mandates that brokers provide updates about any changes in compensation that occur throughout the year.
As if brokers weren’t busy enough during Q4 selling season, the disclosure requirement goes into effect for contracts and agreements entered or renewed on or after December 27, 2021.
While you may think you’re already disclosing enough of your compensation information, this new law says otherwise. Here’s a detailed look at how brokers can prepare, who is required to provide information, and what to provide under the CAA.
Who is required to provide the disclosure?
All brokers and consultants, including their affiliates or subcontractors, who are expected to receive at least $1,000 in direct or indirect compensation are included under this rule.
Direct compensation is defined as the actual pay you receive from an employer. Indirect compensation is a bit trickier but refers to any compensation received from a source other than your client. This could include commissions, payment received from a covered service provider or subcontractor, or compensation related to additional plan services that you are performing.
A covered service provider, brokerage, or consultant broadly includes:
- Insurance products such as dental and vision
- Benefit administration
- Development or implementation of plan design
- Stop loss insurance
- Recordkeeping services
- Pharmacy benefit management services
- Wellness services
- Group purchasing organization preferred vendor panels
- Compliance services
- Employee assistance programs
- Third-party administration services
What you need to include in the disclosure
The CAA requires brokers and consultants to disclose the following, in writing:
- Description of the services to be provided to the covered plan in reference to contract or agreement
- Where applicable, statement that the covered service provider will be providing services directly to the covered plan as a fiduciary (for example, if a broker handles HRA administration for a group)
- Description of all direct compensation reasonably expected to receive in connection with services provided under the contract
- Description of all indirect compensation (vendor to a brokerage firm) reasonably expected to receive in connection with the services provided under the contract, including:
- Arrangement between the payer and covered service provider
- Identification of the services
- Identification of the payer
- Description of the formula when related to block of business, retention, or other contingencies
- Description on a transaction basis (commissions, finder’s fees) based on business placed or retained
- Description of any compensation reasonably expected to receive in connection with the termination of the contract or arrangement
Important timing to know
As mentioned above, the effective date of the disclosure requirement is December 27, 2021 and applies to contracts executed on or after this date. Additionally, brokers must alert their clients to any change in compensation as soon as possible, but no later than 60 days of the change happening. Brokers must also ensure they respond to any written requests made by their client regarding their compensation within 90 days.
Consequences of non-disclosure
While there is currently no actual penalty for non-compliance, brokers should be aware of several consequences for providers and plan sponsors outlined by the CAA:
- Under ERISA, plan fiduciaries may be liable for any losses to the plan that result from a prohibited transaction
- Service providers who participate in a prohibited transaction can face potential liability under ERISA
- The U.S. Department of Labor (DOL) assess an additional 20% penalty on judgments or settlements involving a prohibited transaction
Additional guidance and information are expected to be available over the coming weeks, but brokers should do as much as they can to prepare now based on available data.
Have questions about the new broker compensation disclosures? Our risk and compliance experts are here to help.