What Should Fiduciaries Expect in Health Plan Service Fee Disclosures?

Q: Should retirement plans get a 408(b)(2) fee disclosure from service providers such as consultants and pharmacy benefit managers? How do we determine that the fee is no more than reasonable?

Jamie Greenleaf, co-founder, Fiduciary In A Box; Julie Selesnick, founder and principal attorney, Health Plan Legal Counsel and of counsel, Berger Montague; Rory Akers, vice president, senior ERISA compliance attorney, Lockton Companies; and Alden Bianchi, of counsel, McDermott Will & Shulte, answer below:

A: Under the Employee Retirement Income Security Act, transactions between a plan and a party-in-interest, including service providers such as brokers and consultants, are generally prohibited unless the contract is reasonable. It is the fiduciary’s responsibility to ensure that reasonableness.

The Consolidated Appropriations Act of 2021 bolstered certain disclosure requirements to assist fiduciaries in determining that contracts and compensation paid are reasonable. Specifically, the CAA requires most brokers and consultants providing services to ERISA-covered group health plans (medical, dental, vision, etc.) and expecting to receive at least $1,000 in direct or indirect payment to disclose to plan fiduciaries (typically, the plan sponsor) in writing any and all direct or indirect compensation they receive for providing services to the plan.

Services triggering this requirement include insurance product selection, recordkeeping, medical management, benefit administration, stop-loss insurance, pharmacy benefit manager services, wellness programs, compliance services, employee assistance programs, third-party administration and plan design development.

It is important to note that CAA disclosures do not apply to welfare plans without health care, such as life insurance or disability benefits. The disclosure must include, at a minimum:

• A description of services;
• A statement on fiduciary status;
• All direct, indirect and transaction-based compensation, including non-cash compensation of at least $250;
• Details on conditional and termination-related compensation; and
• Compensation expressed as a dollar amount, formula, per capita charge or other reasonable method.

Service providers must deliver disclosures before entering, renewing or amending a contract; update changes within 60 days; and respond to written requests within 90 days.

This requirement gives plan fiduciaries the information needed to review and determine whether the arrangement with the service provider, including compensation, is reasonable to avoid any potential prohibited transactions under ERISA. Note that there are no specific parameters to determine if a contract or compensation is reasonable; it is a facts- and circumstances-based assessment. Plan fiduciaries should assess fees in relation to the services delivered and the provider’s expertise and, when feasible, benchmark those fees against comparable service providers.

If fiduciaries fail to obtain the disclosure, the contract is deemed unreasonable under ERISA and becomes a prohibited transaction, exposing fiduciaries to liability for plan losses and a 20% penalty on recovered amounts. If disclosure is not received within 90 days of a request, fiduciaries should notify the Department of Labor within 30 days and consider terminating the contract.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.