Understanding the Broker Commission Disclosure
Source: Word & Brown, by Paul Roberts
An important provision in the Consolidated Appropriations Act (CAA) of 2021 affecting insurance brokers is a federal commission disclosure requirement. The 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.
The new disclosure applies in all cases when an insurance agent, agency, or consultant reasonably expects to receive at least $1,000 in “direct” or “indirect” compensation. The law further dictates that plan sponsors (employers) have a legal fiduciary responsibility to ensure receipt of this disclosure from their insurance brokers.
The CAA is a comprehensive omnibus spending measure that combined $900 billion in stimulus relief related to COVID-19 with a $1.4 trillion in other spending for the 2021 federal fiscal year. It consolidated a dozen separate government-spending measures. Historically, CAA is the largest spending measure enacted by Congress, surpassing the CARES (Coronavirus Aid, Relief, and Economic Security) Act passed in April 2020.
The broker commission disclosure applies broadly to all lines of insurance – both fully insured business and self-funded business. It applies broadly to all group health plans and individual health policies, including short-term plans. It includes Medical, Dental, Vision, Employee Assistance Plans (EAPs), Flexible Spending Accounts (FSAs), Health Reimbursement Arrangements (HRAs), and other (non-medical) “excepted benefits” lines of coverage.
While President Trump signed CAA into law on December 27, 2020, and it went into effect one year later, it raised many questions for the industry.
-What does the 12/27/2021 effective date mean?
-Is it applicable to plans quoted/sold on or after December 27, 2021?
-Is it applicable to business effective December 27, 2021?
-How does the Department of Labor (DOL) define “indirect compensation”?
-What does a compliant disclosure look like? Is there a template?
-Because brokers earn commissions in varying ways, how should they all be reported?
The Employee Benefits Security Administration (EBSA) agency released long-awaited additional guidance on December 30, 2021 – after the effective date for the law. It helped clarify some of the significant “unknowns” in the law.
Most significantly, EBSA acknowledges the complexity of CAA especially as it relates to the “diverse service and compensation structures” that exist in the group insurance marketplace. EBSA says it is not feasible for the department to create a specific model notice or provide specific guidance for meeting the broker disclosure requirement. Instead, EBSA and DOL are leaving it up to agents and consultants to make their best-faith efforts to comply.
Instead of creating specific group-benefit regulations, EBSA refers agents to regulations for a similar law imposed on brokers and consultants who transact employers’ retirement and pension plans, in existence since 2012. It notes 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.”
In its bulletin, EBSA says it will consider agents’ and consultants’ best-faith efforts and reasonable interpretations of the law before assessing potential noncompliance penalties. EBSA states that it 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.”
Individual Market Compensation Disclosure
As part of the CAA, under guidelines from the U.S. Department of Health & Human Services (HSS), insurers are required to disclose compensation for individual market policies to potential policyholders at initial enrollment and at renewal. This disclosure must be made before an applicant finalizes his/her/their plan selection.
The disclosure must include direct and indirect compensation, including a commission schedule. If there is no commission schedule, an explanation of the commission (especially bonuses) must be provided. Insurers are also required to report compensation annually to HHS by the last day of July, except for short-term plans that can be filed more frequently.
Group Compensation Requirements
Under the CAA, for contracts entered into or renewed on or after 12/27/2021, brokers earning $1,000 or more in annual compensation must disclose that compensation to clients prior to contract execution. The amount includes both direct and indirect compensation; however, the disclosure does not apply to fee-based work paid directly to the broker by an employer.
Disclosures must be up to date – with information provided to clients within 60 days after a change in commission occurs. A statement of broker/consultant services is also required, including a statement that justifies the commission.
A statement about the plan fiduciary must also be included. In almost all cases, the broker/consultant is not the plan fiduciary.
An employer is required to alert the DOL if it does not receive or review this document.
Impact Beyond Insurance
The CAA compensation disclosure for brokers extends beyond insurance products. The requirement applies to brokers and consultants who earn $1,000 or more in direct or indirect compensation for the selection of:
- * Insurance products
- * Record-keeping services
- * Medical management vendors
- * Benefits administration
- * Stop-loss insurance
- * Pharmacy Benefit Management services
- * Wellness services
- * Transparency tools and vendors
- * Group purchases organization preferred vendor panels
- * Disease management vendors and products
- * Compliance services
- * Employee Assistance Programs
- * Third-party administration services
If you and your agency offer these services, it is important you share compensation information with your clients to ensure your compliance with CAA.
For more about the broker commission disclosure, refer to my previous Compliance column in the Word & Brown Newsroom. It includes links to a Word & Brown-developed disclosure notice to help you comply with the law in best faith. You can even download an unbranded customizable disclosure template. There are also links to state-specific product and commission information, which you will need to comply fully with the disclosure guidelines.
A disclosure template and roadmap developed by the National Association of Health Underwriters (NAHU) is available in the “Compliance Corner” of NAHU’s website.
EBSA has said it will continue monitoring feedback from stakeholders and from its enforcement activities to assess whether additional guidance on CAA may be appropriate and necessary to assist brokers and consultants. Stay tuned to Word & Brown Newsroom for the latest information.