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Disclosure of Commissions Paid by TPAs to Brokers

The question often arises between TPAs and brokers who bring them clients about if and how to disclose to the client the commission or payment being made to the broker. It is not a TPA versus broker situation. The same disclosure rules apply to both, as laid out in section 103(c) of the ERISA law relating to disclosure on Form 5500 Schedule C and under PTE 84-24. Careful disclosure of broker fees is done by TPAs to protect the broker and client plan from serious legal consequences.

First, everyone must understand the U.S. Department of Labor's (DOL) way of thinking of these things. Essentially, DOL assumes that all money generated because of the existence of a plan belongs to the plan. So, for instance, TPAs often say that in placing stop-loss coverage for a plan, they definitely earned their commission from the stop-loss insurer. True,...but DOL would then point out their perspective, that there would be no commission if there were no plan to create the need, therefore the commission actually belongs to the plan.

It is a cultural difference of perspective. People from an insurance background see selling insurance as a business, and assume they will be paid a commission or other reward for those duties. On the other hand, ERISA and DOL tend to hold the view that other than specific service expenses such as administration, legal, and investment, fees, things like commissions & incentive payments have no place (and are often viewed by DOL personnel as "bribes & kickbacks"). Keep in mind that the roots of ERISA were large single-employer and Taft-Hartley plans. No one was bringing or selling the client to the service. Thus, most other payments & transactions were "Prohibited Transactions" (those with any fiduciary* responsibility were prohibited from engaging in such transactions).

*People considered to be subject to ERISA fiduciary responsibility is fairly broad. It includes both the official fiduciary (plan sponsor or trustees)...plus anyone else who knows or should have known about the operations of the plan as "knowing participant" or "co-fiduciaries" (see Section 404 & 405 of Title I of ERISA). A broker or TPA collecting money from a plan for valuable services would have a hard time explaining that they didn't know enough to be considered a co-fiduciary subject to fiduciary & disclosure rules... yet had enough involvement and discretionary power to be worth the amount of money paid.

As early as 1977, DOL recognized the need for a Prohibited Transaction Exemption (PTE) to allow legitimate commissions to be paid by the plan and received by related individuals. It became PTE 77-9 (later updated in 1984 as PTE 84-24). TPAs, for example, make PTE 84-24 disclosure to client plans for the commissions they earn related to the plan, such as placing stop-loss.

Though no longer a prohibited transaction, there are still conditions under PTE 84-24 for receiving commissions. Most importantly, the commission payment and amount...as well as any relationship between the commission payor & recipient...must be disclosed to two or more independent trustees of the plan (usually best to disclose to all trustees such as via the contract). In other words, DOL is still holding the client employer/plan trustee(s) to scrutiny to know and vouch for why they allowed X dollars or percent of money that could/should have gone to the plan assets to be paid to another entity. Part of the 20/20 hindsight scrutiny is whether the payment was a reasonable amount in light of what other plans are paying, and reasonable for the value of services received.

DOL's most specific description of this requirement was in DOL Opinion Letter #86-014A in March 1986. That letter says that an independent agent who is engaged by a service provider, other than an insurance carrier (for fully-insured plans), to market its services and, as a direct result of that agent's transactions with an employee benefit plan, fees or commissions are paid to the agent, such fees and commissions are required to be reported. The DOL does not seem to be concerned where the fees or commissions originate (from whose pocket they technically came). The fact that the commissions or payments took place related to a plan, is what means they must be reported.

OK, so in the real world: A broker says to the TPA, "add on $3 per head per month for me in the administration fee". The TPA, of course, values the broker, and may wish the broker could get even more. However, let's examine the various possible legal implications.

1. If the TPA adds in $3 and passes it on to the broker, several things could happen, such as:

(a). The extra $3 added to whatever the TPA needs to provide quality service (even if absorbed by the TPA) might well make the total package of administration services look less competitive (and thus less "prudent") compared to whatever DOL might decide is the appropriate price for administration services. If so, DOL would probably consider the broker derelict for steering to an "imprudent" deal, and possibly consider the broker "criminal" because the broker received some kind of "kickback". (Also, as DOL Opinion letter 86-014A intimates, it is not where the commission money flows from...it is that it flows at all.

(b). If DOL views it as less "prudent", then the client/employer/plan is technically first in line for probing from DOL for their lack of care in getting the most prudent deal. Being grilled and made to feel stupid by DOL would not make the client love the broker.

(c). DOL, of course, would know that the broker was the person on whom the client relied for expertise to choose the best TPA deal. Thus, the broker is a big target for DOL investigation. Adding insult to injury, ERISA allows civil and/or criminal prosecution. What usually triggers criminal (jail time) prosecution by DOL is if the offense involves lying (including misleading non-disclosure), cheating or personal gain. Receiving the commission or other form of payment is personal gain ("bribes & kickbacks" in DOL lingo).

(d). Even assuming that the extra $3 makes the total deal with the TPA competitively priced overall, DOL would examine the deal and ask the client: first, did he know about the existence and the amount of such commission payments, and second, are the specific services provided by the broker to the plan worth the amount on an ongoing basis. If the client does not seem to know about the payment or any ongoing value of necessary services received from the broker, things look bad for the broker and the client.

Of course, all the same rules and tests apply to the TPA relationship with the client. Thus, TPAs & brokers are in the same boat and held to the same standard. It is not that the TPA is trying to short-change, expose or embarrass the broker. The TPA is primarily protecting the broker and client from falling into serious trouble with DOL. Sure, there's probably someone in town willing to ignore the law and not do proper disclosure...but the broker is the one who could end up in jail because the broker is the one who got "personal gain" (commission or other payment) from the recommendation, and it is the client who will be hassled until he hates the broker.

SPBA is the national association of independent Third Party Administration (TPA) firms whose members provide on-going comprehensive benefits administration services to an estimated 40% of all U.S. workers' employee benefits in every size and format of employment. Because of the breadth & depth of this insight, SPBA works very closely with government regulatory agencies as they interpret benefits laws.

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