The Consolidated Appropriations Act (CAA) was signed into law in late December 2020. Among other things, the law stipulates that benefit brokers and consultants must disclose their expected compensation when selling products to group health insurance customers. Compliance with the provision began on December 27, 2021.
Compensation disclosure is now the law of the land for benefits brokers. It impacts both how brokers do their business and how clients shop for a variety of benefits products including health insurance, life insurance, and vision and dental plans.
What Must Be Disclosed
BenefitMall, a Dallas company that offers general agency services to benefits brokers, explains that the compensation disclosure portion of the CAA is more or less an extension of previous requirements implemented in 2012 by way of modifications to the Employment Retirement Income Security Act (ERISA). At any rate, the CAA clearly defines what must be disclosed.
Brokers must disclose all direct and indirect compensation in excess of $1,000. In most cases, this means disclosing the commission payments made by insurance carriers. An exception to the disclosure rule is non-monetary compensation of less than $250. It does not have to be disclosed to clients.
The Purpose of Disclosure
General agencies have made it a point to remind brokers of their disclosure requirements during the first few weeks of 2022. At some point, brokers will be expected to remember the requirements without having to be reminded. That being said, it might help them to consider why the disclosure requirements were implemented to begin with.
The purpose of compensation disclosure is to fully inform clients of how benefits brokers get paid. Since most benefits are insurance based, most brokers get paid on commission. Clients need to have the assurance that their brokers are offering products based on their needs rather than broker commission payments.
By law, brokers have a fiduciary responsibility toward their clients. In other words, they are compelled to always put the client’s interests first. Adding the compensation disclosure reinforces that requirement by giving employers the ability to know exactly how much money their brokers are earning from the products they sell.
Disclosure in Other Industries
It is interesting to note that compensation disclosure does not apply equally to all industries. Those who justify such requirements as applied to insurance brokers assert that customers have the right to know given the fact that insurance involves sales. The more a broker sells, the more they get paid. However, what if the same disclosure requirements were implemented across every industry?
As things currently stand, the sales representative at your local car dealership does not have to disclose their commission payments. You have no idea how much they will walk away with when you pull off the lot in your brand-new car. Likewise, the sales associate at the furniture store does not have to tell you how much they stand to make by selling you a more expensive dining room set.
So why the difference across various industries? It could be a matter of regulating financial services based on a different standard. All financial services, from insurance to investments, incur significant risk that is not present with car and furniture sales. That added risk is ultimately borne by the consumer. Perhaps the thinking is that compensation disclosure reduces said risk by ensuring brokers and agents are still acting in the best interests of their clients.
Regardless of the exact reasons, benefits brokers must now disclose compensation to their group health insurance customers. Now we wait to see how long it takes before enforcement efforts began in earnest.