Brokers Must Disclose Various Forms of Compensation Received
The law requires that agents, brokers, and/or consultants disclose all compensation to plan fiduciaries. Any covered service provider that receives compensation in excess of $1,000 annually must provide this disclosure.
The disclosure must include both direct and indirect compensation related to the health plan. The requirement applies to fully-insured, self-insured, and level-funded plans. The notification must be delivered prior to the beginning of a plan year and includes requirements to update the group about any changes in compensation throughout the plan year.
Effective December 27, 2021, brokers and consultants of ERISA covered group health plans, regardless of size, will be required to execute a written contract with a responsible plan fiduciary which includes the following information:
The disclosure requirement is comprehensive, and the descriptions provided must be sufficient for the broker’s client to evaluate reasonableness. The disclosure must include all forms of direct, indirect and contingent compensation. For the purpose of these disclosures, compensation is specifically defined to include anything of monetary value, although it excludes non-monetary compensation valued at $250 or less, in the aggregate, during the term of the contract or arrangement. The broker must identify each payer and describe each arrangement.
When disclosing each form of compensation, the law allows the description to be expressed as one of the following:
If the compensation cannot be reasonably expressed in the terms above, the statute allows it to be expressed by any other reasonable method, including a disclosure that additional compensation may be earned but not calculated at the time of the contract. If this is the case, the disclosure must also include:
Direct compensation refers to compensation received directly from the covered plan. Covered service providers must provide a description of all direct compensation, either in the aggregate or by separated by service, that the covered service provider (or an affiliate) reasonably expects to receive in connection with the services described in the contract, including:
When describing any of these compensation arrangements, brokers must detail the way in which the compensation will be received. This would include fees to which the plan has agreed to but that are billed through a carrier in an insured plan arrangement.
Indirect compensation is defined to mean compensation received from any source other than the insurance carrier. This includes compensation from a vendor to a brokerage firm based on a structure of incentives not solely related to the contract with the plan. Any indirect compensation, including any from affiliated companies of the provider as well as any contingent commissions and overrides need to be reported. This includes, but is not limited to, the following:
If compensation will be paid on a transaction basis (e.g., commissions, finder’s fees, or other similar incentive compensation based on business placed or retained) among the covered service provider, affiliate, and/or subcontractor, then the following must also be disclosed:
A wide variety of formula-based compensation structures are utilized in our industry by both carriers and others providing products or services to ERISA health plans (including but not limited to carrier override/contingent compensation programs). Examples include:
As noted above, the statute prioritizes disclosure of the specific formulas but it also specifies that, “if the compensation or cost cannot reasonably be expressed in such terms,” it may be disclosed “by any other reasonable method, including a disclosure that additional compensation may be earned but may not be calculated at the time of the contract.”
Therefore, to the extent that the specific formulas for such compensation structures can be reasonably expressed, the statute requires the formula disclosure.