Among the many new requirements in the Consolidated Appropriations Act, 2021 (CAA), is a requirement that certain service providers of group health plans disclose to plan fiduciaries both the direct and indirect compensation that the service providers expect to earn under the arrangement. The Department of Labor (DOL) recently released guidance and a temporary enforcement policy to help service providers and group health plans comply with the new requirements. Under the temporary enforcement policy, the DOL will not treat a covered service provider as having failed to make the required disclosures to a plan fiduciary as long as the service provider made disclosures in accordance with a good faith, reasonable interpretation of the law. Pending further guidance, the DOL also expects covered service providers and plan fiduciaries to implement the new disclosure requirements using a good faith, reasonable interpretation of the law.
Avoiding Prohibited Transactions Under ERISA
ERISA prohibits certain transactions between a plan and other parties and labels these as “prohibited transactions.” Among the prohibited transactions is a broad prohibition in ERISA section 406(a)(1)(C) against “furnishing of goods, services, or facilities between the plan and a party in interest.” ERISA defines a “party in interest” to include a service provider. Thus, any contract with a vendor who will provide services to an employer-sponsored group health plan subject to ERISA must be evaluated to ensure that the arrangement is not a prohibited transaction. If an arrangement is a prohibited transaction, then any person who is a fiduciary to the plan could be personally liable for losses caused to the plan and other equitable or remedial relief that a court might order.
ERISA section 408(b)(2) provides a framework to follow to ensure that the arrangement with a vendor is not a prohibited transaction. The contract or arrangement will meet the 408(b)(2) requirements if: (1) the contract or arrangement is reasonable; (2) the services are necessary for the establishment or operation of the plan; and (3) no more than reasonable compensation is paid for the services. A real challenge for health plan sponsors has been understanding the compensation that a service provider earns in connection with the services, especially from indirect sources.
The new disclosure law is intended to address this information gap, hopefully providing the plan sponsor with sufficient information about direct and indirect compensation so that the plan sponsor can evaluate the reasonableness of the compensation and the severity of any associated conflicts of interest.
The CAA’s New Disclosure Requirements
The CAA amended ERISA section 408(b)(2) to add explicit disclosure requirements for vendors who provide “brokerage services” or “consulting” to ERISA-covered group health plans and who expect to earn at least $1,000 in direct and indirect compensation under the arrangement. The disclosure requirement applies to contracts that are entered into, extended or renewed on or after December 27, 2021. The disclosure requirement applies whether the group health plan is self-insured or fully-insured and regardless of the size of the group health plan. For these purposes, a group health plan includes not just medical coverage, but also dental, vision, pharmacy, wellness, employee assistance and other coverage considered to be a group health plan under ERISA section 733(a). Fees must be disclosed for any “sub-services” related to these programs, such as development and implementation of plan design, insurance and insurance product selection, stop-loss coverage, recordkeeping, medical management, benefits administration, participation in and services from preferred vendor panels, employee assistance programs or third-party administration services.
In its new guidance, the DOL makes clear that the disclosure requirements apply not just to service referrals from traditional brokers and consultants, but also to any advice, recommendation or referral for these subservices where the service provider expects to earn direct or indirect compensation. For example, a medical plan third party administrator that offers an optional prescription drug program administered by a separate pharmacy benefit manager (PBM) and that receives compensation from the PBM may also be covered by these new disclosure requirements. Plan sponsors should ask about these kinds of arrangements.
If a vendor fails to provide the disclosure information, the plan sponsor can take steps to avoid a prohibited transaction. This requires that the plan sponsor: (1) have a reasonable belief that the vendor was going to provide the information; (2) request the information in writing; and (3) if no information is provided within 90 days of the request, then notify the DOL of the vendor’s failure and decide whether to terminate or continue the contract — and if the contract is for future services, the plan sponsor must terminate the arrangement as expeditiously as possible.
Plan sponsors who are going through an RFP process should consider seeking the disclosure information early on in the process and before starting negotiations with a particular vendor. This could allow the plan sponsor to compare direct and indirect compensation information from a number of vendors, making it easier to determine and document for ERISA compliance purposes whether the compensation that any one vendor earns is reasonable.
If you need assistance in contracting with vendors for your group health plan, Warner can help! Please contact Stephanie Grant, Norbert Kugele or any other member of Warner’s Employee Benefits/Executive Compensation Practice Group.