This Washington Update provides an update on the compensation disclosure requirements that are part of the Consolidated Appropriations Act, 2021. Our team outlines what’s required of providers of brokerage or consulting services to ERISA-covered group health plans, and how NFP will be complying with these requirements.
Service Provider Compensation Disclosures
On December 27, 2021, new service provider compensation disclosure requirements will take effect and apply to contracts or arrangements that are entered into or renewed on or after that date. Specifically, the Consolidated Appropriations Act, 2021 (CAA) requires service providers that provide brokerage or consulting services to ERISA-covered group health plans to disclose their compensation to plan fiduciaries. Similar rules have been in effect for retirement plans since 2012.
The requirement stems from ERISA’s mandate that plans pay only “reasonable compensation” for plan service arrangements. The disclosures are intended to notify employers of the compensation that is paid to their service providers in exchange for their services to the plan. Under the new requirement, a service provider arrangement won’t be considered reasonable if the service provider fails to provide the disclosure and the arrangement will be considered a prohibited transaction.
What Does the Law Require?
The CAA requires covered service providers that reasonably expect to receive $1,000 or more in direct or indirect compensation to provide a disclosure of their services and compensation to plan fiduciaries. Covered service providers are those that provide brokerage and other consulting services to group health plans. For these purposes, group health plans are employer-sponsored plans that provide coverage for medical care (including, but not limited to, medical, dental, vision, FSA and HRA benefits).
As mentioned above, the law becomes effective on December 27, 2021, and applies to any contracts or arrangements that are entered into or renewed after that date. Any compensation or cost changes to the information in the disclosure must be disclosed to plan fiduciaries within 60 days of the change.
The disclosure must include:
- A description of services to be provided
- The amount of direct and indirect compensation that the covered service provider reasonably expects to receive
- The payer of the indirect compensation
- A description of the arrangement between payer and covered service provider for indirect compensation
- A description of compensation that is paid among the covered service provider, an affiliate or a subcontractor if compensation is transaction based (commission, referral fees, incentive compensation for business placed or retained)
- A description of compensation in connection with termination of the contract, including how prepaid amounts will be refunded upon termination
If a covered service provider refuses to provide the disclosure, plan fiduciaries must report the failure to the DOL and consider whether to terminate the provider in order to avoid DOL penalties for engaging in an unreasonable service arrangement and prohibited transaction.
How will NFP comply with the law?
Your NFP advisers and consultants will timely provide these disclosures for any applicable arrangement or contract entered into after the effective date. If you have any questions related to the disclosure requirements or the content of a disclosure you have received, please contact your NFP advisor or consultant. Consulting vendors you utilize outside of NFP will be responsible for providing you with a disclosure as well. If you do not receive a required disclosure, you should submit a written request for the disclosure to the applicable service provider.
The DOL is also obligated to provide additional guidance on the disclosures in the next six months. We will continue to follow this development and alter our disclosure processes and notices once we receive guidance from the DOL.
Not legal advice: Nothing in this announcement should be construed as legal advice. NFP and its subsidiaries do not provide legal or tax advice. Please consult with your appropriate counsel for advice concerning this communication.