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DOL Issues Long-Awaited Final Rules For Service-Provider Compensation Disclosures Under ERISA


On February 3, the Department of Labor issued its long-awaited (and much delayed) final rules for service-provider compensation disclosures under ERISA Section 408(b)(2).  Although these rules do not, by their terms, apply to health and welfare plans, the Department has, as discussed below, confirmed in this issuance that they intend to issue comparable rules on the health and welfare side, and there is reason to believe that many of the concepts in the current rules will appear in any new health-and-welfare Section 408(b)(2) rules.

Section 408(b)(2) requires the fiduciaries of an ERISA plan, among other duties, to ensure that their arrangements with their service providers are "reasonable" and that only "reasonable" compensation is paid for services.   Under these new rules, which replace (with some changes) interim final rules that were issued on July 16, 2010, an arrangement between a service provider and an ERISA plan will not be considered to be "reasonable" unless certain information about the compensation received by the service provider is fully disclosed to the plan fiduciaries reasonably prior to the time the contract is entered into (with any changes to the initial information disclosed no later than 60 days from the date the service provider is informed of the change).  The Department has explained that, in its view, such information is necessary in order to enable plan fiduciaries to make informed decisions about both the service provider and the costs of such services. 

The new rules apply to contracts and arrangements between service providers and ERISA pension plans (i.e., defined-benefit plans, 401(k) plans, etc.).  Under these new rules, service providers must disclose both "direct" compensation (compensation received directly from the ERISA plan) and "indirect" compensation (generally, compensation received from any source other than the ERISA plan but related to or as a result of the services provided to the plan).  Service providers who disclose indirect compensation must also describe the arrangement between the payer and the service provider pursuant to which the indirect compensation is paid.  Notably, service providers may satisfy their disclosure obligations electronically (including through posting such information on a website), provided the plan fiduciary can readily access this information and has clear notification on regarding such access.  The Department, under this rule, has also encouraged service providers to provide this compensation in a summary fashion, and has offered a sample format for this summary of compensation information.  The Department has also indicated that it will issue a notice of proposed rulemaking in the "near future" under which service providers may be required to provide compensation information in such a summary fashion.

Of particular note for ERISA health and welfare plans are two items from the preamble to these final rules.  First, the preamble clarifies that Health Savings Accounts ("HSAs") would not be considered to be a "covered plan" for purposes of this rule. Notably, there is no language in the preamble that would preclude HSAs from being covered by any final health-and-welfare 408(b)(2) rules; however, the rationale used in the preamble – that HSAs are generally not considered to be employee benefit plans within the meaning of ERISA section 3(3) – would seem to be a rationale that would hold equal currency in the health and welfare context. Second, the preamble confirms that the Department is intent on issuing health-and-welfare specific rules, and that there will likely be at least some differences between those rules and these final rules.  How significant those differences might be is, of course, not clear at this point, but the Department has acknowledged that health-and-welfare service providers often have compensation structures that are vastly different from the compensation structures of service providers to retirement plans, and hence some modifications will be necessary to account for this factor.

The discussion in the preamble to these rules of an intent to issue health-and-welfare specific Section 408(b)(2) rules is notable, in that it is arguably the strongest statement of a continuing intent by the Department to issue such rules since the Department held a public hearing on that topic on December 7, 2010.  Although the exact contours of health-and-welfare Section 408(b)(2) rules  is, of course, unknown, the general concepts of the existing final rules, as briefly summarized above, may prove to be concepts that will guide any such new rules. 

We will, of course, continue to monitor developments in this area and will provide updates as learn more in this complex and evolving area.

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