DOL Holds Hearings on Reasonable Contracts for Welfare Benefit Plans

Friday, January 14, 2011

On November 5, 2010, the Department of Labor (Employee Benefits Security Administration) announced it would begin holding hearings on potential conflicts of interest and other issues between Plan sponsors and plan administrative service providers (covered service providers) under section 408(b)(2) of ERISA.

This announcement follows the release of the Interim Final Rules by DOL on "Reasonable Contract or Arrangement Under Section 408(b)(2)—Fee Disclosure" on July 26, 2010 and the required 45-day comment period.  In most cases, a “plan's” administrative service fees are generally charged back to the plan and thus paid in part by the plan’s beneficiaries, i.e., the employees, retirees, and surviving spouses and children of retired or deceased employees.  Regardless of the plan funding mechanism, fully insured vs. self-funded, premiums charged by the plan contain numerous “fees” above the pure premium rates upon which the DOL would like to shed light.

DOL's objective for these hearings is to gather information on “issues related to the transparency of service provider compensation and potential conflicts of interest in the welfare benefit plan industry”.  Furthermore, “the Department continues to believe that fiduciaries and service providers to welfare benefit plans would benefit from regulatory guidance regarding fees and conflicts of interest for the same reasons that apply to fiduciaries and service providers to pension plans”.

Plan sponsors may want to take notice of these hearings since it is clear that DOL will follow the same path it did in regulations for service provider fees and conflicts of interest for defined contribution and benefit plans earlier in dealing with “parties in interest” compensation issues. 

It may be helpful to review the fee structure for both fully insured and self-funded welfare plans.  The key issue at hand is that in order to be charged back to the plan, fees must meet a “reasonableness” test.

Fully insured plan fees are generally comprised of various fees charged by the carrier to offset for their operating expenses, e.g., home office costs, licensing costs, commissions, premium and other taxes, loss adjustment expenses … etc.  These “fees” are in addition to the pure premium, which covers only actual losses associated with the plan, i.e., medical, dental, life, and disability claims.  Since these fees are “hidden” within the total premium paid by either the plan sponsor and/or the employee, it is often unclear to the buyer what proportion of the premium is for fees and what is for actual protection.  Fees for fully insured plans are usually in the range of 2% to 5%; however, fees can be much higher.  Experienced professional level benefit mangers understand fully insured fee structures and are careful to balance the fees against the value received.

Self insured plan fees can be much more straightforward in the form of an Administrative Service (ASO) fee, a flat lump sum fee paid by the plan sponsor and/or the plan to an insurance carrier or Third Party Administer (TPA) on a per month per member basis.  ASO fees cover the carrier or TPA’s administrative service cost to process enrollment, claims adjudication, and other services and are often in the range of $30 to $50 per month per member.  The “premium equivalents” are the periodic payments collected by the plan sponsor and/or the plan, usually through payroll deductions, from the plan participants and charged back to the plan sponsor.  The catch with self funded plans is that if claims are higher than expected, the plan sponsor, usually the employer, must make up for any financial shortfall.

As stated earlier, DOL’s purpose for holding these hearings is to develop rules for “transparency of service provider compensation and potential conflicts of interest”.  Thus allowing plan participants, i.e., employees to better understand for what they are paying for when purchasing insurance.