ERISA Form 5500 – Reporting Changes
S. Owen Hunt
Associate General Counsel
Virginia CE Forum 2009
Course # 201721
Objectives
Upon completion of this Course, participants will be able to:
ƒ Explain the background of fee transparency
ƒ Describe the changes to Schedule A
ƒ Describe the changes to Schedule C
ƒ Explain the tattling rule
For Internal Training Purposes Only
2
1
Introduction
ƒRequirements for group welfare plans with more than 100
participants to file Form 5500 annual reports have been in place since
1974.
ƒBroker compensation disclosure concerns really ramped up back
when Elliott Spitzer still had a reputation
ƒSince 2005, Anthem and other carriers have been reporting to group
health plans commission payments in all its forms:
ƒ Straight commission
ƒ Bonus programs (including trips and prizes)
ƒ And certain types of override payments
3
For Internal Training Purposes Only
Introduction
ƒDOL believes that neither plan participants nor plan
administrators have enough information about fees paid
by plans or money received by plan service providers
because of their relationship to plans.
ƒIn November, 2007 the DOL published a new regulations
and updated Form 5500 forms and instructions.
Purportedly clarified what existing laws and regulations
required already.
ƒRequires not only reporting of all forms of commission,
but also other types of indirect compensation that few
before had thought about reporting.
For Internal Training Purposes Only
4
2
Introduction
For plan years beginning Jan. 1, 2009 and after, the U.S.
Department of Labor (DOL) is requiring employee benefit
plans to include the value of meals, gifts, sporting event
tickets and similar items provided by insurers and service
providers to brokers and consultants on Form 5500
Schedule A and C filings.
This is in addition to the monetary commission and
bonus/override compensation currently reported on these
schedules.
5
For Internal Training Purposes Only
Schedule A
Schedule A is the portion of the group benefit plan’s Form
5500 that details:
ƒthe premium collected by insurance companies
ƒHigh level information about benefits and expenses for
experience rated policies
ƒCommissions and other amounts paid to agents/brokers
It is the last point that has had the most activity directed
to it by virtue of DOL guidance and regulation.
Schedule A is filed by most plans, even by self-funded
plans because of stop-loss policies that are often
purchased.
For Internal Training Purposes Only
6
3
Schedule A
A group health plan must include the following broker
compensation information on Schedule A:
ƒSales and base commissions
ƒMonetary and non-monetary forms of compensation if
based upon, in whole or in part, the value of plan policies
But there are three important exceptions…..
7
For Internal Training Purposes Only
Schedule A
Exception 1: Override commissions
Override commissions are not reportable IF:
Paid to a general agent of manager (a) for managing an
agency, or (2) for performing administrative functions for
insurers; and
Not based in whole or in part on the value of the policies
the agent has.
So:
overrides expressed as a flat fee would not be reportable
But: overrides expressed as a % of premium would be.
For Internal Training Purposes Only
8
4
Schedule A
Exception 2: Administrative Fee paid by insurer
Administrative fees paid to brokers by insurers are not
reportable IF:
1. The fee is for services that assist insurer in fulfilling its
contractual obligations to provide benefits under the
policy, AND
2. All of the following are true:
ƒ All benefits must be guaranteed by the insurer
ƒ Premium is the only charge to the plan
ƒ Payment is not incidental to the sale (again, no % of
premium payments)
9
For Internal Training Purposes Only
Schedule A
Exception 3: De minimis non-monetary compensation
And this is where the fun begins.
We already mentioned that gifts, meals and entertainment
(GM&E) are examples of non-monetary compensation that
must be reported.
But GM&E that are de minimis need not be reported
But to get to the determination of de minimis, we have to
jump through more hoops than a circus animal.
For Internal Training Purposes Only
10
5
Schedule A
GM&E are de mimimis if they are “occasional” and of
“insubstantial value”
What is “insubstantial”?
The GM&E must be:
ƒless than $50 in value, AND
ƒthe aggregate of all GM&E from the insurer must be less
than $100.
BUT: An insurer need not count toward the $100 limit any
GM&E less than $10 in value
11
For Internal Training Purposes Only
Schedule A
Before you get too excited, remember that Schedule A is
based on amounts attributable to the group health plan.
So to the extent GM&E is not directly related to one
particular plan, the amount of the GM&E is allocated
among the relevant book of business (which may include
self-insured business)
So the moral of the story, “sell more business so that
there is a broader book of business to allocate over” – Jeff
Ricketts
For Internal Training Purposes Only
12
6
Schedule A
Anthem has set up an elaborate system of GM&E expense reporting
to insure that we capture what we need to capture.
All GM&E expenses are tracked by recipient
1. An expense of less than $10 is not included in report calculations
2. Expenses in excess of $10 are:
ƒ Allocated among the recipient’s book of business if not plan
specific, and if allocated amount is greater than $10 and less than
$50, it accumulates to each plan’s $100 limit
ƒ Accumulated toward the plan $100 limit if plan specific and less
than $50
3. An expense in excess of $50 that is attributable to a plan is
reported to that plan
13
For Internal Training Purposes Only
Schedule A
Tattling
New Schedule A’s for 2009 have been modified to include
a section for plans to report to the DOL any insurer that
fails to furnish Schedule A information.
But plan administrators are encouraged in the instructions
to contact insurers to request the missing information
before making the report.
For Internal Training Purposes Only
14
7
Schedule C
Schedule C is the portion of the Form 5500 where plans must identify
their significant service providers and report on the compensation
they receive (whether directly for services rendered on indirectly by
virtue of their position with the plan)
Each service provider must report its compensation, but the plan
need only specifically identify a service provider that receives more
than $5,000 in compensation for the plan year.
Service providers paid less than $5,000 are not identified, but the
amounts must be accumulated and reported by the plan in a lump
sum with all other such service providers.
15
For Internal Training Purposes Only
Schedule C
What types of compensation must be reported?
Direct Compensation
which includes amounts paid directly from plan assets,
e.g., administrative service fees.
Indirect Compensation
Which means payments from sources other than the plan
or the plan sponsor that are in connection with services to
the plan or the person’s position with the plan.
For Internal Training Purposes Only
16
8
Schedule C
What types of compensation must be reported?
Direct Compensation
which includes amounts paid directly from plan assets,
e.g., administrative service fees.
Indirect Compensation
Which means payments from sources other than the plan
or the plan sponsor that are in connection with services to
the plan or the person’s position with the plan.
17
For Internal Training Purposes Only
Schedule C
So what does the new Schedule C reporting rule mean to
you as an insurance consultant or administrator?
A group may pay you for insurance advice or to perform
certain services such as COBRA administration. BUT:
Do you receive direct comp from plan assets?
ƒYou may not if the employer is paying you from general
funds.
ƒBut you may if the cost of your services is factored into
the rate set for employee contributions.
For Internal Training Purposes Only
18
9
Schedule C
If you receive indirect compensation by virtue of your
position with the plan, reporting of such compensation
does not depend on the use of plan assets.
Examples of indirect compensation:
ƒGM&E (same rules as for Schedule A apply)
ƒFinders fees
ƒFloat
ƒTransaction based fees from third parties
19
For Internal Training Purposes Only
Schedule C
Certain types of indirect compensation are categorized as
“eligible indirect compensation” (EIC)
EIC must be disclosed to the plan, but the plan need not
report the amount on Schedule C.
EIC includes:
ƒFinders fees
ƒFloat
ƒTransaction based fees from third parties
BUT does not include GM&E.
For Internal Training Purposes Only
20
10
Schedule C
EIC must be disclosed to the plan as follows:
ƒThe fact that the compensation exists
ƒThe purpose for the compensation (the services provided
for the compensation)
ƒThe amount of the fee, an estimate of the fee, or the
formula used to calculate the fee
ƒThe entity paying the fee
21
For Internal Training Purposes Only
Schedule C
Special provisions for “key service providers”
Key service providers are (for health plan purposes) plan
fiduciaries, contract administrators, consultants and
brokers
If a key service provider earns more than $5,000 in
compensation, and either
ƒDisclosed more than $1,000 in indirect compensation
other than EIC; or
ƒDisclosed the receipt of indirect compensation other than
EIC by a formula rather than an amount.
The amount or the formula must be reported by the plan
separately on Schedule C.
For Internal Training Purposes Only
22
11
Schedule C
What if you hire subcontractors to provide assist in
providing the services you are contractually hired to
perform?
Special rules for bundled arrangements
ƒ Occurs when the plan hires one company to provide a range of
services from a company, either directly or through affiliates or
subcontractors, which are priced to the plan as a single
package rather than on a service-by-service basis
Generally these can be reported as a single package by the
primary contractor unless the other entities receive EIC or fees
on a per transaction basis.
23
For Internal Training Purposes Only
Schedule C
Certain forms of compensation, especially indirect
compensation, may be attributable to many plans (for
example, float and GM&E)
Just as insurers allocate certain types of broker
compensation among a broker’s book of business, a
consultant can allocate compensation attributable to
many plans among those plans.
Keep in mind that allocations may be across plans, some
of which may not be large enough to have to file a Form
5500.
For Internal Training Purposes Only
24
12
Schedule C
More tattling:
As with Schedule A, there is a new section on Schedule C
for plan administrators to report which service providers
were unwilling to provide required information.
25
For Internal Training Purposes Only
The Dreaded Form 5500 Quiz
Problem 1
Anthem sponsors a fine CE training course for all of its
appointed brokers who care to endure it. The cost of the
event is $6,000, which roughly comes out to be about $60
per broker.
How should Anthem report this compensation?
What if the invitee list was limited to those appointed
brokers that sold 10 new cases for Anthem in the previous
year?
For Internal Training Purposes Only
26
13
The Dreaded Form 5500 Quiz
Problem 2
An Anthem account executive (AE) meets with a broker
and the group over 100 to discuss its renewal. During the
meeting the renewal deal is sealed. Afterwards:
AE, Broker and GA go to lunch and each meal is $18 with
tip. AE pays the bill.
AE and Broker go to lunch to celebrate, meal is $30 a
piece. AE pays the bill.
AE and Broker go to lunch ($18 a piece) to enhance their
ongoing relationship. AE pays the bill.
AE and Broker go to lunch ($18 a piece) to enhance their
ongoing relationship. Broker pays the bill.
27
For Internal Training Purposes Only
The Dreaded Form 5500 Quiz
Problem 3
An insurance agency is hired by a large group health plan
to provide COBRA administration and is paid $10 per
employee per month for the service. The broker for the
agency that sold the case is paid $1.00 per employee per
month for the sale. The agency also pays a PEO $5.00
per employee per month for the personnel needed to
perform many of the services.
How must these fees be reported?
For Internal Training Purposes Only
28
14
Summary
Now more than ever disclosure is key
Inventory your sources of compensation and the vendors
that you pay to assist you.
Keep track of whether compensation is earned across
your book of business or on a plan specific basis
Help your clients by correctly categorizing your
compensation as direct, eligible indirect, or ineligible
indirect.
Don’t be a pig when Anthem treats you to lunch.
29
For Internal Training Purposes Only
Questions?
For Internal Training Purposes Only
30
15