ERISA requires contracts between a health plan and its service providers to be “reasonable.” One element of a contract’s “reasonableness” is the price of the service. Service providers often receive indirect compensation from third parties. In order to know whether a service provider’s total compensation is reasonable, the plan fiduciary must know all sources and amounts of compensation paid to the provider in connection with plan services.
The Department of Labor promulgated a rule governing disclosure of compensation paid in connection with pensions plans, but has never done so for service providers regarding welfare plans. The Consolidated Appropriations Act (CAA) rectifies this omission.
Disclosure of Compensation under the CAA
The CAA provides that no contract or arrangement between a group health plan and a covered service provider will be considered “reasonable” unless the requirements of the Act are met.
- A covered service provider is broadly defined to include providers of brokerage services, plan administration services, and consulting services; however, a provider is not covered unless it (or its affiliate or a subcontractor of the provider) expects to receive at least $1,000 in direct or indirect compensation for its services.
- Direct compensation means compensation received from a plan.
- Indirect compensation is compensation received from any source other than a plan, the plan sponsor, the service provider, or its affiliate.
A covered service provider is required to disclose to the plan (in writing) a description of:
- the services to be provided;
- all direct and indirect compensation that it, or any affiliate or subcontractor, expects to receive in connections with its services;
- any compensation that will paid on a transaction basis (such as commissions, finder’s fees, and similar incentive-based compensation); and
- compensation the service provider, affiliate, or subcontractor expects to receive in connection with the termination of its contract or arrangement with the plan.
Additional “musts” regarding disclosures:
- Disclosures must be made reasonably in advance of the date the contract is entered into, and in advance of each renewal or extension, to enable the plan fiduciaries to evaluate the reasonableness of the compensation.
- Mid-term changes to the required disclosures must be made within 60 days of the date the service provider learns of them.
- Disclosure must also be made if the plan administrator requests them in connection with any reporting or disclosure requirements under ERISA (such as the Form 5500).
- Timing of the disclosures must be made in accordance with the administrator’s request, unless the provider is prevented from doing so by extraordinary circumstances beyond the service provider’s control, in which case the disclosures must be made as soon as practicable.
If a service provider fails to give the plan fiduciary the required information, the fiduciary will not be “deemed to have entered into an unreasonable agreement” if the fiduciary:
- had a reasonable belief that the service provider would provide it;
- makes a written request for it; and
- if the provider still refuses to provide the information, reports the service provider to the Secretary of Labor.
Additionally, if the service provider has not provided the information within 90 days of the fiduciary’s written request, the fiduciary must determine whether to terminate the contract with the service provider. If the information relates to future services, the fiduciary must terminate the agreement as expeditiously as possible, consistent with the duty of prudence.
This provision is effective for contracts or arrangements with a group health plan that are effective, extended, or renewed on or after 12/27/21.
Regulations clarifying the application of the statute are likely forthcoming.
- For example, what is the scope of the term “arrangement?” It must refer to something other than a contract. Some service provider contracts may be with plan sponsors rather than the health plans themselves. Others may be with plans that are unfunded, i.e., have no plan assets.
Whether and how the statute will apply to these and other “arrangements” commonly seen in connection with group health plans awaits regulatory amplification.