The Consolidated Appropriations Act (CAA) of 2020, the biggest piece of legislation enacted in American history, created an array of complex new laws for many sectors; one of those sectors is health insurance. The CAA brings significant changes to insurance agents and their clients, directly impacting brokers’ sales practices and employers’ legal responsibilities in 2022.
The new law, which took effect on December 27, 2021, requires brokers and consultants to disclose expected commissions, in writing, to their insurance clients in advance of a new sale, renewal, or change to a health insurance contract. It applies in all cases when that insurance agent/agency or consultant reasonably expects to receive at least $1,000 in “direct” and/or at least $250 in “indirect” compensation. Furthermore, the law dictates that employers (plan sponsors) have a legal fiduciary responsibility to ensure receipt of this disclosure from their insurance brokers. A flub from either party results in the insurance contract becoming “unreasonable” and out of compliance in the lens of the Department of Labor (DOL), which oversees enforcement of federal ERISA law and these new CAA changes, under its Employee Benefits Security Administration (EBSA) agency.
There is no small plan exemption, and no product exemption. Agents and consultants must disclose projected commissions for all lines of insurance – group insurance, individual insurance, fully insured business, self-funded insurance, etc. Furthermore, the law applies broadly to all “group health plans,” including dental, vision, FSA, HRA, and other (non-medical) “excepted benefits” lines of coverage.
The EBSA released long-awaited additional guidance on December 30, 2021, to help insurance professionals better understand the law – clarifying some significant “unknowns” in the law, which are related to the group insurance industry.
Firstly, and perhaps most significantly, EBSA candidly acknowledged the complexity of the new disclosure requirement – particularly due to the “diverse service and compensation structures” that exist in the group insurance marketplace. This is especially true due to compensation arrangements that are “often complicated, and frequently structured to reflect state law.” Because of this, EBSA says it is “not feasible” for the department to create a specific model notice or provide specific instructions for meeting the new disclosure requirement. Instead, DOL/EBSA is leaving it up to agents and consultants to make their best-faith efforts to comply with the new law – which entails creating their own notices, including all relevant compensation information pertinent to their businesses.
To make the waters a bit murkier, EBSA also clarified that DOL is “not issuing any regulatory guidance at this time” and that it “does not believe that comprehensive implementing regulations are needed” for the new law. This means that agents and consultants must go by the letter of the CAA law, which, unfortunately still contains many unknowns.
Instead of creating group-benefit specific regulations, EBSA refers agents to regulations for a similar law it imposes on brokers and consultants who transact employers’ retirement/pension plans, which has been in existence since 2012. Furthermore, EBSA noted that “although group health plan compensation arrangements may differ from pension plan compensation, much of the terminology and many of the requirements in . . . the CAA and the DOL’s regulation on pension plan disclosure are identical.” EBSA refers agents and consultants to its 2010 guidance and 2012 updates on pension plans for definitions on the law’s terminology and requirements.
On an encouraging note, EBSA announced in its bulletin that it will consider agents’ and consultants’ best-faith efforts and reasonable interpretations of the law before assessing potential noncompliance penalties (which remain unclarified). Likewise, EBSA states that it also expects plan fiduciaries (employers) to comply with the requirements using good faith, reasonable interpretations of the law.
DOL/EBSA reminds brokers, consultants, and plan fiduciaries that “the required disclosures are intended to provide the responsible plan fiduciary with sufficient information to assess the reasonableness of the compensation to be received and potential conflicts of interest that may exist as a result of a covered service provider receiving indirect compensation from sources other than plan sponsor.”
It further clarifies that DOL considers the “significant goal of the new disclosure requirements is to enhance fee transparency, especially for service arrangements that involve the payment of indirect compensation.” To clarify its own views of “indirect compensation,” EBSA lists an example of a brokerage firm receiving compensation from a third-party provider in return for referring group health plans to such provider. Because this hypothetical third-party fee would be paid to the broker from a source other than the plan sponsor/client, it is considered “indirect” compensation that must be disclosed – in addition to the standard “direct” commission the agent earns on the sale.
As such, it is imperative for brokers and consultants to disclose all “indirect” compensation involved in a transaction – if any – along with standard “direct” compensation. This can include carrier bonuses paid on a “per member, per month” basis, other carrier bonuses, etc.
A few additional bits of recent clarification provided by DOL/EBSA are as follows:
- * The law applies to contracts executed (renewed, or altered) on/after December 27, 2021. It does not apply to business that was conducted before 12/27/21, for effective dates beginning 1/1/21, etc.
- * For cases of a Broker of Record (BOR) change, compensation must be disclosed on the earlier of: the date the BOR was submitted to the carrier, or the date on which a group application is signed for insurance for the following plan year.
- * Brokers may share calculations (e.g., percentages of premiums) earned in order to comply with the requirement. This is because most group insurance commissions depend on enrollment and eligibility, which are not known until after the contract is signed and Open Enrollment is conducted.
Word & Brown General Agency has created its own disclosure notice for agents to comply with the new requirements of the law in best faith. You can download the unbranded customizable disclosure template here. Enter your name, your client’s name and contact information, and your logo on the top right corner of the document to personalize it. Be sure to include a statement of your services, commission percentages earned on premiums, and an addendum to the disclosure template if you expect to receive any type of indirect compensation for your business.
Word & Brown has references to show commissions paid by carrier, state, and Market Segment to aid your disclosure efforts as follows:
- California – Small Group Products and Broker Commissions
- California – Large Group Products and Broker Commissions
- Nevada – Small Group Products and Broker Commissions
- Nevada – Large Group Products and Broker Commissions
Lastly, EBSA notes that it will continue monitoring feedback from stakeholders and from its enforcement activities to assess whether, and if so what, additional guidance may be necessary to assist brokers and consultants with this new requirement. While no regulations are immediately forthcoming, new information may continue to be released over the coming months. Stay tuned to Word & Brown for all the latest.