- Department of Labor Issues Guidance on Insurer's Duty to Disclose Commissions and Fees
- May 16, 2005 | Authors: Lawrence K. Cagney; Alicia C. McCarthy
- Law Firm: Debevoise & Plimpton LLP - New York Office
State regulators have recently focused on whether brokerage fee arrangements involving welfare plans subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA") have been fully and properly disclosed. The U.S. Department of Labor ("DOL") has recently set forth its position concerning the requirement to disclose such arrangements on Schedule A of Form 5500, Annual Return/Report of Employee Benefit Plan.
In Advisory Opinion 2005-02A, issued February 24, 2005, the DOL stated that, subject to a narrow exception addressed in a prior Advisory Opinion, all commissions and fees directly or indirectly 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 or fees paid by an insurer where a broker's eligibility for payment is based on the value of contracts placed with an insurer. Specifically, the DOL stated that disclosure of the following is required on the Schedule A:
- persistency and profitability bonuses;
- fees paid from a separate bonus pool and not directly from the insurance company's general assets;
- non-monetary forms of commissions and fees (such as trips, prizes, stock awards or gifts);
- finder fees paid by a third party and reimbursed by the insurance company; and
- fees which have been recharacterized as profit sharing, delayed compensation or "reimbursement for marketing or other expenses."
The fact that a policy is held in the name of the employer or that the premiums are paid from its general assets does not change the reporting requirement. If the commission or fee is based on the placement of more than one policy, the insurer must provide plan administrators with a proportionate allocation of the commissions and fees attributable to each contract. The method for allocation must be reasonable and disclosed to plan administrators. The DOL noted that calendar year allocation is reasonable even if the policy is not maintained on a calendar year basis, since for tax reporting purposes (Form 1099 or Form W-2), insurers keep records on a calendar year basis.
In addition to arguably broadening the scope of reportable commissions and fees, the DOL expressly narrowed the general agent override exception it previously created. This exception is only for payments to a general agent or manager for managing an agency or performing other administrative functions. The DOL stated that this exception did not include a payment calculated under a formula, based in whole or in part, on the value of contracts placed with an insurer.
Under ERISA, insurers must transmit information regarding these fees and commissions to plan administrators and certify this information as correct within 120 days of the end of the plan year. The deadline for a 2004 calendar year plan is April 30. In the Advisory Opinion, the DOL stated that a willful violation of an insurer's legal duty to furnish accurate information about commissions and fees is a criminal violation of ERISA. No mention is made of any possible civil penalties for any failure to disclose. Implicitly, the absence of any reference to possible civil penalties under ERISA in connection with such disclosure failures would appear to confirm the absence of such penalties.