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Letter to Brokers, Clients and Friends of TPAs on the Disclosure of Commissions and Payments

To:   Brokers, Clients and Friends of TPAs

Caution:  Disclosure of Commissions & Payments

From:  SPBA Vice President Anne Lennan

Should health plans comply now with the Department of Labor proposed rules on the disclosure of health plan commissions?

In December 2007, the Department of Labor (DOL) released a proposed rule (§2550.408b-2) that requires plan service providers to disclose the compensation they will receive, directly or indirectly, and any conflicts of interest that may arise in connection with their services to an employee benefit plan. The new rules set forth the items that must be in writing and disclosed to the plan fiduciary (i.e., plan sponsor) before the contract or arrangement begins.  Broker fees and commissions earned for placing fully insured business with an insurer are subject to the new disclosure rules. 

The Society of Professional Benefit Administrators (SPBA) has decades of experience in working with Federal agencies and understanding the force of a proposed regulation.  Often, the employee benefit community lives with a proposed regulation for many years before the final regulation is released (COBRA continuation of health care proposed rules are one example).  The proposed rule expresses the intent of the Federal agency and the agency enforcers will always reference the proposed rule when confronting potential violators.  Courts also give deference to proposed rules. 

The strength of this disclosure proposed regulation is greater than most because it is clarifying the long-standing ERISA rules of prudent fiduciary responsibility.  The spirit of ERISA has required detailed disclosure all along, with the goal of providing comprehensive and useful information to plan sponsors when entering service contracts.  The proposed rule is not a new concept or a change in policy.  The Department issued the proposed rule because they believed that service providers were not adhering to the existing spirit of ERISA disclosure rules.  Given the increasing complexity of compensation arrangements, the Department believed a more explicit statement was needed.

Predicting when a final regulation will be released is risky business as agency bureaucracies are highly unreliable.  Nonetheless, the Assistant Secretary of DOL's Employee Benefits Security Administration, Bradford Campbell, has given the disclosure rules priority and stated that the rules will be released by the end of 2008.               

Whether the final rules are released shortly or not, all plan service providers should be making a good faith effort to adhere to the proposed rules.  "The Labor Department will not tolerate service providers who fail to disclose fees or compensation arrangements that impact benefit plans," noted Bradford Campbell when commenting on a recent multi-million dollar ERISA violation fine imposed for failing to disclose fees paid to an insurance broker.  Civil penalties for engaging in a prohibited transaction could go as high as 100 percent of the amount involved. We heard from the Chief of ERISA DOL Enforcement at our conference in April that DOL intends to pursue far more of their investigations as criminal offenses.  Dismissing the force of a proposed regulation is flirting with financial and professional disaster.          

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