QUESTION: We have heard that there are revised requirements for agreements with plan service providers. As an employer that sponsors an ERISA group health plan, what should we know about the changes?
ANSWER: ERISA’s prohibited transaction exemption for plan service arrangements has been amended to add extensive disclosure requirements that apply to certain types of arrangements beginning in December 2021. As background, the prohibited transaction rules broadly prohibit “the furnishing of goods, services, or facilities” between an ERISA plan and a party in interest—which includes any plan service provider. Fortunately, a statutory exemption allows for reasonable arrangements between a plan and a party in interest for certain necessary services so long as no more than reasonable compensation is paid for the services. In general, whether service provider compensation is reasonable is determined on a case-by-case basis, depending on facts and circumstances. Under the revised rules, however, compensation for certain types of services will be considered reasonable only if specified disclosure requirements are met.
These disclosure requirements apply to any contract between a group health plan and a “covered service provider” entered into, extended, or renewed on or after December 27, 2021. (Arrangements that do not involve group health plans and “covered service providers” remain subject to the facts-and-circumstances standard.) A covered service provider is a service provider that reasonably expects to receive at least $1,000 in direct or indirect compensation for providing brokerage services or consulting under the contract or arrangement. Brokerage services include services related to selecting insurance products or plan-related services or vendors—including services or vendors for benefits administration, third-party administration, recordkeeping, compliance, medical management, pharmacy benefit management, transparency tools, wellness, or EAPs. Consulting includes development or implementation of plan design, and insurance (or insurance product) and benefits administration selection. It also includes consulting relating to recordkeeping, compliance, and other TPA services; medical management, disease management, and pharmacy benefit management services; and participation in group purchasing organizations and preferred vendor panels.
For a covered service provider’s compensation to be considered reasonable, the service provider must disclose specified information in advance and in writing to a responsible plan fiduciary (generally a fiduciary with authority to cause the plan to enter into, extend, or renew the contract). Broadly, the disclosure must describe the services to be provided, indicate whether the service provider expects to be a plan fiduciary, and describe all forms of direct and indirect compensation the service provider expects to receive in connection with the arrangement, including the manner in which compensation will be received.
As the employer plan sponsor, your company will need to evaluate the reasonableness of compensation payable to a covered service provider, using the disclosed information to inform that analysis. A plan fiduciary will not be considered to have engaged in a prohibited transaction due to a covered service provider’s failure to disclose the required items if the fiduciary reasonably believed the service provider would make the disclosures, requests the information in writing, and notifies the DOL if no response is received within 90 days. In addition, the fiduciary must determine whether to terminate or continue the contract, acting in accordance with the general fiduciary duty of prudence. If the agreement relates to future services, the fiduciary must terminate the contract or arrangement “as expeditiously as possible, consistent with such duty of prudence.”
For more information, see EBIA’s Self-Insured Health Plans manual at Section XXIII.C.5 (“Service Provider Compensation Must Be Reasonable”) and EBIA’s ERISA Compliance manual at Section XXVIII.D.7 (“Reasonable Compensation to Third-Party Service Providers”). You may also be interested in our upcoming webinar “Administrative Services Agreements for Group Health Plans” (live on 6/10/2021).
Contributing Editors: EBIA Staff.