Many of the retirement plan compensation rightsizing reforms implemented over the last decade are finding their way to health and welfare benefit plans.
Early 2022 To-do: Employer Fiduciary Responsibilities for Health & Welfare Plans
New rules apply to health plan service provider compensation in 2022 that employers must know and be equipped to manage. This e-alert provides employers with background on these new rules, describes the new rules from the employer’s perspective and suggests an employer action plan for 2022.
What Has Happened in The Past That Has Led to These New Requirements?
ERISA imposes fiduciary responsibilities on plan sponsors, employers and other plan fiduciaries with regard to compensation of service providers. Even though health and welfare plans involve much more money than retirement plans and even though health and welfare service provider compensation is much higher than retirement plan provider compensation, to date, retirement plans and their service provider compensation practices and procedures have received almost all of the attention from employers, governmental regulators and plaintiff lawyers. We have seen this in (i) the issuance of comprehensive retirement plan service provider disclosure requirements by the Department of Labor nearly a decade ago, (ii) a very active class action lawsuit environment against retirement plan sponsors that have allowed their retirement plans to overpay their brokers, recordkeepers, etc. and (iii) perhaps most importantly, a heightened awareness of the responsibility to ensure retirement plan fees are competitive by internal plan fiduciaries (e. g., plan committees). All of these factors have translated ultimately into a very reduced retirement plan service provider compensation structure, which has translated into enhanced retirement benefit economics to employees. Putting aside the class action legal actions, which have and continue to hurt employers greatly, these compensation right-sizing reforms have helped employers and employees tremendously; simply shifting the economics of plan maintenance from the service providers to the plans.
But what about medical plan (and other health and welfare plan) service providers? Why doesn’t the employer scrutinize these service providers and their compensation in the same manner as the employer scrutinizes retirement plan service providers? Isn’t there even more money in these benefits from the employer’s perspective, and therefore more scale in terms of the opportunity for savings?
What is the new law and what is the employer required to do?
Under the Consolidated Appropriations Act of 2021 (CAA), effective generally January 1, 2022, new detailed compensation disclosure requirements apply to group health plans. These are patterned very much in the same manner as the previously imposed retirement plan disclosures requirements. These new disclosures should be hitting the desk of employer benefits representatives during 2022, perhaps unexpectedly.
Employers are required to use these disclosures meaningfully as part of the employer’s overall duty to ensure that the plan pays no more than reasonable compensation to its service providers. (While the CAA disclosure rules are technically limited to service providers providing specified brokerage and consulting services to ERISA-governed group health plans, it is prudent for employers to take the steps outlined below for all of their health and welfare plans and their service providers.)
Here are a few things our employer clients should know and do beginning in 2022 in light of these new rules:
•This is a good thing. Employers should know how much money their benefit plan service providers make (from all sources) for what the service providers do and how the compensation structure compares to the marketplace. If there is excessive compensation in place, that hurts two parties only—the employer and the employee.The right-sizing of compensation that comes from greater information can do nothing but help those two parties.
•Although the rules impose from the naked eye positive requirements on the service provider (suggesting that it is the service provider who will be liable in the event of non-compliance), the determination of the reasonableness of service provider compensation and the avoidance of impermissible conflicts of interest is an employer responsibility. Employers, as fiduciaries, must demand that their covered service providers comply with these new disclosure requirements (and should demand that all service providers disclose all compensation received for the services rendered). Employers who do not demand this and do not use the information they receive are potentially liable.
•If the employer maintains a fiduciary apparatus for its retirement plans (such as a fiduciary committee), that apparatus (or one like it) should add to its jurisdiction and practices the assurance of health and welfare plan service provider compensation reasonableness.
•The employer (e.g., management or any fiduciary committee) should begin the year by reaching out to service providers (e.g., medical plan consultants, medical plan brokers, etc.) to obtain from them assurance that the service provider has a plan for the required disclosures.
•The employer should be ready to receive, process in a fiduciary environment, understand, and act upon theses disclosures when they are received.
There is no doubt that the class action lawyers see this development as a watershed event for new cases, as they anticipate that service providers will provide confusing disclosures and, in turn, employers, through apathy or lack of information, will allow overcompensation to occur into the future. This is exactly what happened in the retirement plan realm, and many employers are still paying dearly for the sins of years past. For these risk-management reasons, but mostly for the reason discussed in the first bullet above, we urge our clients to begin the process of compliance and discernment immediately.
What should the employer do at this time?
Summary of Action Steps:
1. As soon as possible, the employer should reach out to brokers, consultants, etc. to ensure that (at a minimum) their service providers have a compliance plan to allow the employer to comply with these detailed compensation disclosure requirements;
2. The employer should ensure that its fiduciary structure now used for retirement plans is adapted to review the reasonableness of health and welfare plan service provider terms and compensation; and
3. The employer’s fiduciary/decision-maker should be prepared to review, understand and act upon disclosures to be received.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any tax advice contained herein is of a general nature. You should seek specific advice from your tax professional before pursuing any idea contemplated herein.
Securities offered through Lion Street Financial, LLC (LSF) and Valmark Securities, Inc. (VSI), each a member of FINRA and SIPC. Investment advisory services offered through CapAcuity, LLC; Lion Street Advisors, LLC (LSF) and Valmark Advisers, Inc. (VAI), each an SEC registered investment advisor. Please refer to your investment advisory agreement and the Form ADV disclosures provided to you for more information. VAI/VSI, LSF and CapAcuity, LLC. are non-affiliated entities and separate entities from OneDigital and Fulcrum Partners.
Unless otherwise noted, VAI/VSI, LSF are not affiliated, associated, authorized, endorsed by, or in any way officially connected with any other company, agency or government agency identified or referenced in this document.