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Broker Compensation Disclosure Requirements in CAA 2021

The Consolidated Appropriations Act, 2021 (CAA) signed into law by President Trump on Dec 27, 2020, contained many policy provisions including a transparency provision that requires brokers and consultants to disclose to their group health clients the compensation they expect to receive and describe the services they provide in return. The bill also contained a compensation disclosure requirement in the individual market.

The Group Health Plan Disclosure Provision

Section 202 of the CAA expands ERISA’s existing disclosure requirements under Section 408(b)(2), which were previously implemented in 2012 and applied to retirement plans only. Under the regulation, an arrangement is not “reasonable” unless the covered service provider, the broker, discloses its direct and indirect compensation. Any arrangement that is not “reasonable” is a “prohibited transaction” under ERISA.

Beginning Dec 27, 2021, brokers and consultants to group health plans will be required to disclose their compensation if they expect to receive $1,000 or more in direct or indirect compensation for providing their services. The bill defines compensation as anything of monetary value except non-monetary compensation valued at $250 or less. Generally, the definition of a group health plan includes everything (group plans, HRAs, ICHRAs, FSAs, etc) except QSEHRAs. The $1,000 threshold makes the requirement applicable in nearly all cases. The only exceptions could be the smallest groups (at or near 2 employees) depending on the premium and arrangement. The disclosures must include:

  1. A description of the services provided to the covered plan.
  2. A description of all direct compensation.
  3. A description of all indirect compensation.
  4. A description of all transaction-based compensation.
  5. A description of any compensation payable in connection with termination and, if applicable, how any prepaid amounts may be refunded and calculated.
  6. If applicable, a statement indicating the broker expects offer fiduciary services to the plan. This does not and should not apply in nearly all circumstances.

The disclosure requirement is all-encompassing and the descriptions must be sufficient for the client to evaluate reasonableness. It includes all forms of compensation including standard, ongoing compensation, bonuses, finder’s fees, prepaid (advanced) commissions, payments made by third parties, incentive programs not solely related to the plan, etc. Compensation value can be expressed in the aggregate or by service as a dollar amount, formula, per capita charge, or any other reasonable method with a good faith estimate. The broker must identify each payer and describe each arrangement.

The broker discloses to the client only, not the Department of Labor. However, if the broker fails or refuses to disclose, the plan fiduciary is liable for a DOL penalty unless the employer reports the failure in writing to the DOL. The broker is liable under Section 502(i), which allows the DOL to assess penalties against service providers whose arrangements result in prohibited transactions.

There are various timing requirements.

  • Brokers must disclose the required information prior to the date the contract or arrangement is entered into, extended, or renewed.
  • Brokers must disclose compensation changes within 60 days of being informed of the change.
  • Brokers must correct inadvertent errors and omissions within 30 days of discovery.
  • Brokers must respond to any written request made by the client within 90 days.
  • If the broker fails or refuses to disclose, the employer must request disclosure in writing. If the broker fails or refuses to respond to the written request, the client must submit a formal notice to the DOL within 30 days.

Implications:

The new disclosure requirements are complex and cumbersome. Carriers can help brokers by simplifying and streamlining their compensation formulas so they are easier to quantify and explain. Tiered and/or fluid commission rates—e.g.: where a carrier determines a rate by broker’s block size and adjusts the tier quarterly—should go away. Incentive trips will likely go away too because they are difficult for a broker to predict the likelihood of qualification in advance and their value proportional to each client. Carriers will likely minimize and consolidate their incentive programs to rely more on longer term, standardized programs and less on last minute, short term initiatives.

This disclosure requirement is separate from annual Form 5500 reporting. It is forward-looking, broad, and addressed to the employer. Form 5500 is retrospective, narrower, filed with the DOL, and a matter of public record. Form 5500 will continue to apply, just like it has for retirement plans in the years since the 2012 regulations.

Section 202 does not define the period of time used to determine if an arrangement pays $1,000 in compensation or what constitutes the extension or renewal of an arrangement, which is the trigger for disclosure about arrangements that are active on Dec 27, 2021. The forthcoming implementing regulations will define both. Generally, we expect the arrangement period to apply on a plan year basis.

The Section 202 disclosures do not supersede existing state disclosure laws, except where state laws prevent the required disclosures. These new disclosure requirements are in addition to any state requirements.

Background and Context:

The broker compensation disclosure provision was a pet issue for Senators Lamar Alexander (R-TN) and Patty Murray (D-WA) since 2019 when they introduced the Lower Health Care Costs Act., a bill that targeted surprise medical billing, prescription drug prices, and transparency across the entire health care system (including broker compensation). That bill never passed on its own. Not to be deterred, the Senate health committee saw an opportunity to bury the same bill within the massive 5,593-page CAA. Section 202 appears on page 4,475. The CAA is the fifth longest bill ever passed by Congress, a $2.3 trillion “must pass” omnibus spending bill, which funds the government for nine months and directs $900 billion in stimulus funding for pandemic relief.

The bill includes 3,126 pages—more than half its size—of policy riders not directly associated with government funding or pandemic stimulus. Politico reported: “As the final major piece of legislation of the 116th Congress, party leaders tacked on several other bills to the spending measure, an annual tradition that lawmakers describe as loading up the ‘Christmas tree.'” Congressional leaders finalized the text on the night of Sun, Dec 20 after tacking on their last minute additions. Members of Congress received the finalized 5,593-page text the next afternoon (Mon, Dec 21), carefully read, studied, and analyzed it with all the prudence and diligence one should expect before spending $2.3 trillion, and began voting on it hours later at 6:27pm CST.

The Individual Market Coverage Disclosure Provision

Section 202(c), which amends Public Health Service Act Section 300gg–41, requires health insurers offering individual and short-term health insurance coverage to disclose to enrollees and to the HHS all direct and indirect compensation provided to agents and brokers associated with plan selection and enrollment.

  • To the enrollee – The insurer must disclose prior to the individual finalizing plan selection and include the disclosure on any documentation confirming enrollment.
  • To the HHS – The insurer must report annually, prior to open enrollment.
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