Broker Commission and Service Disclosure Notices

You may have recently received a notification from your broker that they have sent you a Commissions and Services Disclosure Notice. This is because of a new requirement that went into effect as of December 27, 2021, that was included in the Consolidated Appropriations Act (2021). This Act amended ERISA Section 408 (b)(2)(B) to require that brokers and other service providers disclose to welfare plan fiduciaries how much they are paid by the plan and the services that they offer to the client, when the broker or service provider reasonably expects to receive $1,000 or more in total direct or indirect compensation from the plan.

Basically, it is a way of the broker stating, “this is what I do, and this is how much I am paid to do it.” The commission disclosure notice also states where the compensation comes from, if it is direct compensation from the plan itself, indirect compensation from another source, or if there is any compensation that is non-monetary such as perks or additional incentives given to them as a result of placing business with a particular vendor or insurance carrier.

How Are Brokers Typically Compensated?

Brokers are typically compensated by being issued commission from the insurance carriers and providers OR by a flat service fee that they charge the client or business directly in lieu of commissions. The IRS Form 5500 that plans with 100 or more participants are required to submit to the IRS contains information related to the commissions that the broker was paid for the plan year that is being filed, so this is not an entirely new concept for businesses to be informed of how much their broker is being paid by their insurance carriers, but it is new for small businesses who do not have to file a Form 5500.

What New Disclosure Rules Are Included in This Notice?

The new compensation and services disclosure notice is not a bill or invoice, but it is required to be signed or acknowledged by both the broker and the plan fiduciary. The plan fiduciary is required to keep a copy of the disclosure on file with their records as part of their due diligence and they could be required to pay a penalty if the plan were to be audited by the Department of Labor and the disclosure is not produced for review by the auditor.

The compensation and services disclosure notice should be provided to the fiduciary during the renewal or vetting process. The reasoning behind this is that if a broker is promoting or recommending a particular plan over another, a plan fiduciary will be able to see if there is a financial incentive for the broker to be suggesting that specific plan, or if it is simply the best option for the business moving forward. For example, if the renewing plan pays the broker a 5% commission on the premium received, but an alternate carrier that they are recommending would pay them a 10% commission on the premium or a 4% on the premium it can become evident that they may be recommending a plan because it will pay them a higher commission, or they are recommending another alternate plan because it really is in the best interest of the company even if it means a pay cut for them.

Medical, dental, and vision plan commissions are required to be disclosed, but disability and life insurance premiums are not required to be included.

What if I Haven’t Received A Commission and Services Disclosure Yet?

If your current broker has not given you a commission and services disclosure, ask them for it. Keep in mind it is required to be given before a new contract is signed with the carrier or service agreement with the broker, so you may not see it until closer to your renewal. But if you don’t receive it from your broker or prospective broker, be sure to ask for it as the plan fiduciary does have a joint responsibility to have it as part of their records. 

Still have Questions about the Broker Commissions and Services Disclosure Notice? You’ll be in good hands with AEIS and their compliance risk assessment services. Give AEIS a call at (650) 348-6234, contact AEIS by email at team@aeisadvisors.com, or fill out a contact form.

Disclaimer: Any information related to compliance, laws and regulations, or other subject matters in this blog is intended to be informational and does not constitute legal advice regarding any specific situation. The content of this blog is based on the most up-to-date information that was available on the date it was published and could be subject to change. Should you require further assistance or legal advice, please consult a licensed attorney.