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Guest Article

Deloitte logo

(From the March 14, 2005 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

New DOL Guidance on ERISA Disclosure Requirements for Insurers

ERISA health and welfare benefit plans that provide benefits through insurance policies or contracts must include information about the related fees and commissions on their Form 5500 annual reports. But plan administrators must rely on insurers to provide this information, and a recent Department of Labor advisory opinion indicates some insurers may be underreporting commission and fee payments made to brokers and agents. Advisory Opinion 2005-02A (February 24, 2005). The Department of Labor issued the advisory opinion to "clearly explain [its] views regarding" these reporting requirements.

This advisory opinion focuses on the insurer's obligations under ERISA to disclose relevant fees and commissions to the plan administrator in these circumstances, and to certify the accuracy of this information. Insurers may want to review their current practices with respect to disclosing this information in order to ensure those practices are consistent with the views the Department of Labor expressed in this advisory opinion. Insurers that willfully fail to comply with these obligations may be subject to criminal liability under ERISA.


Any health or welfare benefit plan that provides benefits through insurance contracts must file Schedule A ("Insurance Information") with its Form 5500 annual report. The plan has to file a separate Schedule A for each insurance contract, and each Schedule A must disclose the following information:

  • the names and addresses of all agents, brokers, or other persons who received direct or indirect sales commissions or fees from the plan;
  • the amount of such commissions or fees; and
  • the purpose for any fees paid.

According to the 2004 Instructions for Schedule A, "commissions and fees include amounts paid by an insurance company on the basis of the aggregate value (e.g., policy amounts, premiums) of contracts or policies (or classes thereof) placed or retained." The plan also must report "[t]he amount (or pro rata share of the total) of such commissions or fees attributable to the contract or policy placed with or retained by the plan."

Plans do not have to report this information for individuals who received "minimal" compensation for performing "solely ministerial duties." ERISA § 103(c)(3). Also, plans do not have to report "override commissions, salaries, bonuses, etc., paid to a general agent or manager for managing an agency, or for performing other administrative functions." But plans must report all sales commissions and fees that do not fall within these narrow exceptions.

The plan administrator usually will not have all the information needed to comply with these Schedule A reporting requirements. Therefore, ERISA requires the insurance carrier to furnish the information to the plan administrator-- and certify the accuracy of such information-- within 120 days following the end of each plan year. ERISA § 103(a)(2) and Labor Reg. § 2320.103-5. But there apparently is some confusion over the types of commissions and fee payments that insurance companies must disclose, which prompted the Labor Department to issue this advisory opinion.

What Fees and Commissions Must Insurers Disclose?

According to the advisory opinion, insurance companies must disclose commissions and fees that are based, "in whole or in part, on the value (e.g., policy amounts, premiums) of contracts or policies (or classes thereof) placed with or retained by an ERISA plan, including, for example, persistency and profitability bonuses." Specifically, insurers must disclose more than just sales commissions on individual policies or contracts. For example, an insurance company might have to disclose non-monetary rewards, "such as prizes, trips, cruises, gifts or gift certificates, club memberships, vehicle leases, and stock awards," if based, "in whole or in part, on policies or contracts placed with or retained by ERISA plans." Also, insurers might have to disclose finder's fees and similar payments made by third parties to brokers, agents, and others in connection with an insurance contract, but only if the insurer "reimburses the third party for the payment either separately or as a component of fees paid by the insurer to the third party."

The advisory opinion states insurers must disclose these fees and commissions even if:

  • the employer pays premiums for the contract or policy from its general assets;
  • the policy is held in the plan sponsor's name;
  • a broker or agent signs on behalf of the insurance company;
  • the fees and commissions are paid from a separate bonus fund, and not from the insurer's general assets; or
  • the fees and commissions are classified as "profit-sharing" payments, delayed compensation, or as "reimbursements" for various marketing or other expenses.

Exception for Payments to General Agents or Managers

As noted, the instructions to Schedule A provide a specific exclusion from the reporting requirement for "override commissions, salaries, bonuses, etc., paid to a general agent or manager for managing an agency, or for performing other administrative functions." According to the advisory opinion, this exclusion does not apply to "brokers representing insureds."

Also, the exclusion applies only to payments "for 'managing an agency' or for 'performing other administrative functions' for the insurer." The exclusion specifically does not apply to amounts paid to a general agent or manager "if they 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 such amounts were labeled override commissions, salaries, or bonuses."

Allocating Commissions and Fees among Contracts

In order to satisfy their disclosure obligations, "[i]nsurers must provide plan administrators with a proportionate allocation of commissions and fees attributable to each contract for which a Schedule A must be filed." According to the advisory opinion insurers can use "any reasonable method" for allocating commissions and fees to policies or contracts, but the method must be disclosed to the plan administrator.

The advisory opinion does not give examples of reasonable allocation methods, but it does warn a method is not reasonable if it "attributes a disproportionate share of commissions or fees (including incentive or contingent compensation payments) to non-ERISA plans in order to avoid Schedule A reporting." Specific examples of unreasonable allocation methods include:

  • allocating commissions or fees across all policies, including policies that did not contribute to the recipient's eligibility for, or the amount of, the commission or fee payment; and
  • declaring that certain fees or commissions are not "paid" for any policies providing benefits for ERISA plans if those policies were included in determining the recipient's eligibility for, or the amount of, the payment.

The advisory opinion does clarify that insurers can allocate fees and expenses on a calendar year basis, even if the plan or policy year is not a calendar year. This may make the process a bit easier for insurers that keep records on fees and commissions on a calendar year basis for tax reporting purposes.

Recordkeeping Requirements

Finally, the advisory opinion notes insurers are required to keep records regarding fees and commissions subject to the Schedule A reporting requirement for at least 6 years. ERISA § 107.

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 questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Bart Massey 202.220.2104, Elizabeth Drigotas 202.879.4985, Diane McGowan 202.220.2077, Taina Edlund 202.879.4956, Martha Priddy Patterson 202.879.5634, Laura Edwards 202.879.4981, Tom Pevarnik 202.879.5314, Mike Haberman 202.879.4963, Tom Veal 312.946.2595, Stephen LaGarde 202.879.5608, Deborah Walker 202.879.4955, J.D. Lutz 202.879.5366

Copyright 2005, Deloitte.

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