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Guest Article

Deloitte logo

(From the February 15, 2010 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Pharmacy Benefit Manager Fees Must Be Reported on Schedule C


Welfare plans that are subject to the Form 5500 annual reporting requirement must report certain fees and rebates paid to the plan's pharmacy benefit manager as compensation on the new Schedule C.

New FAQs on PBM Compensation

The U.S. Department of Labor released two new "Frequently Asked Questions" (FAQs) regarding compensation paid to pharmacy benefit managers that must be reported on the new Schedule C to Form 5500. The Department previously issued a set of twenty-five FAQs that address a broad range of questions regarding what and how compensation that is paid to a service provider should be reported on the new Schedule C which is effective for the 2009 reporting year. The FAQs address the treatment of promotional gifts, meals and entertainment, educational expenses, revenue sharing, insurance company expenses for guaranteed income general accounts, contingent deferred sales charges, and others. Last week the Department added two new questions to specifically address compensation that is paid to a pharmacy benefit manager (PBM).

The new FAQs -- numbers 26 and 27 -- note that PBMs perform many services for which they are compensated, including services as a third-party administrator, claims processor, and developer of the plan's formulary and pharmacy network. The FAQs make clear that fees for these services would be reportable as direct compensation on Schedule C. Examples include the following payments from plan assets:

  • Dispensing fees charged by the PBM for prescriptions filled.
  • Administrative fees regardless of whether they are reflected as part of the dispensing fees.
  • Ancillary administrative service fees such as for recordkeeping, data management, information reporting, formulary management, utilization review, claims adjudication, and other services.

The FAQs also note that pharmaceutical manufacturers compete to ensure that their drugs are included on PBM formularies. PBMs often negotiate discounts and rebates with drug manufacturers based on the drugs that are sold by the PBM or dispensed under the plans administered by the PBM. For example, discounts or rebates in the form of "formulary payments" are made by the manufacturer to secure formulary status, or in the form of "market-share payments" are made by the manufacturer to encourage the dispensing of particular drugs. The FAQs make clear that:

  • Pharmaceutical manufacturer discounts and rebates to the PBM that are attributable to an ERISA plan are currently being examined by the Department to determine the extent to which they may be considered compensation for Schedule C reporting purposes. Pending further guidance, the Department's position is that discount and rebate revenue received by the PBM generally does not have to be reported even though it is based in part on the quantity of drugs dispensed under ERISA plans administered by the PBM.
  • An agreement between the plan and the PBM to use rebates or discounts to compensate the PBM for its services, however, would make the amounts reportable as indirect compensation on Schedule C.

The complete set of FAQS on the Schedule C is available on the Department's website.

Schedule C Reporting Obligation

Not all welfare plans are required to annually report on Form 5500 or Schedule C. A plan that covers less than 100 participants at the beginning of the plan year -- and which is unfunded, fully insured, or a combination of both -- is exempt from the annual reporting requirement. See Department of Labor Regulation § 2520.104-20 and 2009 Instructions to Form 5500, page 4. Where such a welfare plan has 100 or more participants at the beginning of the plan year, it is subject to the annual reporting requirement but is not required to file Schedule C. See DOL FAQs #25, Department of Labor Regulation § 2520.104-44 and 2009 Instructions to Form 5500, page 22.

For purposes of these limited reporting exemptions, the definitions are very specific. A plan is considered:

  • "Unfunded" if it pays benefits solely from the general assets of the employer. A plan is not considered unfunded if it uses a trust or a separately maintained fund -- or if it receives employee contributions.
  • "Insured" if the premiums are paid directly by the employer from its general assets or from employee contributions that are forwarded to the insurance company within three months after they are received. Where employee contributions are used to pay benefits or expenses instead of premiums, the exemption does not apply. See Department of Labor Regulation ? 2520.104-20 and -44.

A special carve-out is extended to certain contributory welfare plans under Department of Labor Technical Release 92-01. Those plans associated with an IRC § 125 cafeteria plan are not currently required to hold participant contributions in trust -- and are treated as coming within the exemption even though the employee contributions are used to pay plan benefits or expenses. Those plans not associated with an IRC § 125 cafeteria plan are similarly not required to hold employee contributions in trust as long as the employee contributions are used within three months to pay for premiums.

As a result, these limited reporting exemptions are not available, and reporting would be required for small welfare plans (generally on a short Form 5500-SF which does not include a Schedule C) and for large welfare plans (on a Form 5500 which would include a Schedule C) for:

  • Welfare plans that pay benefits or premiums from a trust or a separately maintained fund.
  • Contributory welfare plans (including IRC § 125 plans) that under the Technical Release have not established a trust but which use employee contributions to pay insurance premiums more than three months after they are received.
  • Contributory welfare plans (other than IRC § 125 plans) that under the Technical Release have not established a trust but which use employee contributions to pay benefits or expenses.

Deloitte logoThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955.

Copyright 2010, Deloitte.


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