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Disclosure Requirements for Insurers Servicing ERISA Plans Are Spelled Out in U.S. Advisory Opinion
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August 1, 2005
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By David L. Bacon
Thelen Reid Brown Raysman & Steiner LLP
The Department of Labor ("DOL") has issued Advisory Opinion 2005-02A, which offers guidance on the duty of insurance companies to furnish ERISA plan administrators with information for disclosure on tax forms about commissions and fees paid to brokers, agents and other persons.
Because ERISA plan administrators do not know what fees have been paid by insurers, they rely on information provided by insurers in preparing Schedule A of the Form 5500 Annual Return/Report of Employee Benefit Plan. Following is a summary of Advisory Opinion 2005-02A, which sets out broad disclosure obligations for insurance companies providing coverage for ERISA plans.
Full Disclosure: All commissions and fees attributable to a contract or policy between a plan and an insurance company, insurance service or similar organization must be reported on Schedule A. This includes commissions and fees based, in whole or in part, on the value of contracts or policies placed with or retained by an ERISA plan. According to DOL, the Schedule A instructions should not be construed to mean that payments to an agent or broker are to be reported only when they are termed a "sales commission" on an individual contract or policy. The disclosure obligation also applies to:
|  | Non-monetary forms of compensation, such as prizes, trips, cruises, gifts or gift certificates, club memberships, vehicle leases and stock awards when entitlement to or the amount of compensation is based, in whole or in part, on policies or contracts placed with or retained by ERISA plans.
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| | Fee and commission information, even if the premiums for the contract or policy are paid from the employer's general assets or the policy is held in the employer's name.
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| | Fees and commissions paid from an insurer's separate bonus fund rather than directly from its general assets regardless of whether they are classified as "profit-sharing" payments, delayed compensation or "reimbursements" for marketing or other expenses.
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| | Finders' fees and similar payments made by a third party to brokers, agents and others in connection with an insurance policy when the insurer reimburses the third party for such payment either separately or as a component of the fees paid by the insurer to the third party.
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Reasonable Allocation: The insurer may reasonably allocate commissions and fees if the insurer describes the method of allocation to the plan administrator. A reasonable allocation of commissions and fees should take into account fees and commissions paid for policies providing benefits for ERISA plans if those policies were included in determining the broker or agent's eligibility for or the amount of commission or fee payment. An allocation method that attributes a disproportionate share of commissions and fees to non-ERISA plans in order to avoid Schedule A reporting is not reasonable. Allocating commissions or fees across all policies, including policies that did not contribute to the broker or agent's eligibility for or to the amount of commission or fee payment, also is not reasonable.
Because insurers may keep records regarding fees and commissions paid on a calendar year basis for tax reporting purposes, a reasonable allocation method could allocate fees and commissions to Schedule A based on a calendar year calculation even if the plan year or policy year were not a calendar year.
Rules for General Agent, Manager: Amounts paid to a general agent or manager are exempt from disclosure for Schedule A only if they are solely for "managing an agency" or for "performing other administrative functions" for the insurer. The disclosure required for Schedule A includes fees paid to a general agent or manager if those fees were calculated under a formula based, in whole or in part, on the value of contracts or policies placed with or retained by ERISA plans, even if these fees were labeled override commissions, salaries or bonuses. The terms "general agent" and "manager" as used in the instructions to Schedule A do not include brokers representing the insureds.
Recordkeeping Requirements: Insurers required to certify fee and commission information to plan administrators must keep those records for at least six years because records regarding fees and commissions reported on Schedule A are necessary to verify, explain or clarify the accuracy and completeness of information contained in the Form 5500 annual report.
Significance of the Advisory Opinion: Advisory Opinions are not entitled to the same degree of deference as an agency regulation. They lack the force of law because they do not involve formal adjudication or notice-and-comment rulemaking. DOL interpretations contained in an Advisory Opinion are entitled to respect under Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944) only if and to the extent they have the "power to persuade. " See, Christensen v. Harris County, 529 U.S. 576 (2002).
Courts are likely to believe that Advisory Opinion 2005-02A has the "power to persuade." In the area of reporting and disclosure, Congress gave DOL broad powers to require disclosure of financial information it finds "necessary and appropriate." While Congress has imposed a number of specific reporting and disclosure requirements by statute, it has left the details, including all enforcement responsibilities, to DOL.
The Advisory Opinion provides guidance in a field where guidance is plainly required because of ambiguity in and differing interpretations of the Schedule A instructions. It appears that DOL issued the Advisory Opinion in order to achieve a much-needed level playing field in the area of insurance company reporting of fees and commissions.
Moreover, the guidance is consistent with the current full disclosure trend in federal legislation and regulation. The Advisory Opinion requires not only a uniform method of reporting and disclosure but also one that will provide a higher level of information to plan fiduciaries. This will allow the fiduciaries to compare bids and proposals from insurance companies on an apples-to-apples rather than an apples-to-oranges basis, which in turn should lead to greater protection of the interests of participants and beneficiaries. The disclosure requirements may persuade plan fiduciaries, who know they will be required to report commissions, fees and expenses in public documents, to be more prudent in their purchases of insurance products and more even-handed and cautious in avoiding undue influence. Lastly, the greater level of disclosure will allow DOL, upon review of Schedule A, to assess in a realistic manner whether more than "reasonable compensation" was paid for the insurance product, which would be a "prohibited transaction."
The Advisory Opinion will impact the manner in which bids and proposals are framed because it will affect the figures going into the "sale commission" disclosure required by Prohibited Transaction Exemption 84-24.
The Advisory Opinion also may foretell future required disclosure in the area of mutual funds. Many 401(k) plans offer both mutual funds and insurance products as plan investments. Although non-insurance providers currently are required to provide only limited data about fees and other payments, DOL may decide to level the playing field by requiring plan fiduciaries to seek similar disclosure, including full disclosure of revenue-sharing arrangements and other factors that might compromise the loyalty of a plan's service providers, in areas not governed by Schedule A.
The opinion is available on the EBSA Web site at www.dol.gov/ebsa/regs/aos/ao2005-02a.html.
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For more information about the issues covered in this report, please contact David L. Bacon in our Los Angeles office at 213-576-8078 or at dlbacon@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2005 Thelen Reid Brown Raysman & Steiner LLP
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