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February 24, 2005
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2005-02A
ERISA
Sec. 103
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Michael V. Conger
Robert A. Browning
Polsinelli Shalton Welte Suelthaus PC
700 West 47th Street, Suite 1000
Kansas City, MO 64112
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Dear Messrs. Conger and Browning:
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This responds to your request on behalf of Fortis
Benefits Insurance Company regarding certain annual reporting requirements
applicable to employee benefit plans and insurance companies under Title I
of the Employee Retirement Income Security Act of 1974 (ERISA).
Specifically, you asked for guidance on the duty of insurance companies that
provide health and welfare benefit insurance coverage to ERISA plans to
furnish information to the plan administrator on commissions and fees paid
to brokers, agents, and other persons for disclosure on Schedule A
(Insurance Information) of the Form 5500 Annual Return/Report of Employee
Benefit Plan.
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In connection with your submission, you allege that some
in the insurance industry have developed a pattern and practice of
underreporting commission and fee payments to brokers and agents based on
incorrect interpretations of the Schedule A, the Schedule A instructions,
and Advisory Opinion 86-17A (Apr. 28, 1986). The Department is providing the
following guidance in an effort to clearly explain the Department’s views
regarding the current Schedule A reporting requirements.
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Section 103(a)(2) of ERISA provides, in relevant part,
as follows:
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If some or all of the information necessary to enable
the administrator to comply with the requirements of this title is
maintained by - (A) an insurance carrier or other organization which
provides some or all of the benefits under the plan, or holds assets of
the plan in a separate account, . . . such carrier [or] organization . . .
shall transmit and certify the accuracy of such information to the
administrator within 120 days after the end of the plan year (or such
other date as may be prescribed under regulations of the Secretary).
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Section 103(c) of ERISA provides, in relevant part, as
follows:
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The administrator shall furnish as a part of a report
under this section the following information: . . . (3) Except in the case
of a person whose compensation is minimal (determined under regulations of
the Secretary) and who performs solely ministerial duties (determined
under such regulations), the name of each person (including but not
limited to, any consultant, broker, trustee, accountant, insurance
carrier, actuary, administrator, investment manager, or custodian who
rendered services to the plan or who had transactions with the plan) who
received directly or indirectly compensation from the plan during the
preceding year for services rendered to the plan or its participants, the
amount of such compensation, the nature of his services to the plan or its
participants, his relationship to the employer of the employees covered by
the plan, or the employee organization, and any other office, position, or
employment he holds with any party in interest. . . . (5) Such financial
and actuarial information including but not limited to the material
described in subsections (b) and (d) of this section as the Secretary may
find necessary or appropriate.
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Section 103(e) provides, in relevant part, as follows:
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If some or all of the benefits under the plan are
purchased from and guaranteed by an insurance company, insurance service,
or other similar organization, a report under this section shall include a
statement from such insurance company, service, or other similar
organization covering the plan year and enumerating – . . . (2) . . .
the names and addresses of the brokers, agents, or other persons to whom
commissions or fees were paid, the amount paid to each, and for what
purpose. . . .
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The Department’s regulation at 29 C.F.R. § 2520.103-5
implements section 103(a)(2) of ERISA with respect to annual reporting
requirements under Title I by setting forth the information that shall be
provided to the plan administrator and by requiring that the information be
certified and transmitted within 120 days of the close of the plan year. Of
particular relevance to your inquiry, section 2520.103-5(c)(1) states that:
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The information required to be provided to the
administrator shall include –(1) In the case of an insurance carrier or
other organization which: (i) Provides funds from its general asset
account for the payment of benefits under a plan, upon request of the plan
administrator, such information as is contained within the ordinary
business records of the insurance carrier or other organization and is
needed by the plan administrator to comply with the requirements of
section 104(a)(1) of the Act and § 2520.104a-5 or § 2520.104a-6 . . . .
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Section 104(a)(1) of ERISA and 29 C.F.R. §§ 2520.104a-5
and 104a-6 describe the obligations of the plan administrator filing an
annual report using the Form 5500. Section 2520.103-5(d)(1) further provides
that the insurance company or other organization must certify to the
accuracy and completeness of the information in a written declaration, and
states that such certification serves as a written assurance of the truth of
the facts stated therein.
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The Department’s regulations at 29 C.F.R. § 2520.103-1
and the instructions for the Schedule A require that, subject to certain
exemptions,(1) the
plan administrator filing an annual report using the Form 5500 must include
a separate Schedule A for each insurance contract used to provide benefits
under the plan. Line 2 of the Schedule A requires the plan administrator to
report information about each agent, broker, and other person who was paid
commissions or fees, including the amount of commissions and fees paid. In
that regard, in Advisory Opinion 86-17A (Apr. 28, 1986), the Department, in
concluding that so-called “excess commissions” were required to be
reported, stated that “all fees and commissions directly or indirectly
attributable to a contract between a plan and insurance company, insurance
service, or similar organization must be reported on the Schedule A.” The
instructions for the 2004 Schedule A state that reportable 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 instructions further explain
that “[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 must be reported [as commissions or fees], as appropriate.”(2)
By contrast, a single, narrow exception is provided for compensation
paid by the insurance company to a “general agent” or “manager” for
“managing an agency, or for performing other administrative functions,”
which does not need to be reported regardless of whether called “override
commissions, salaries, bonuses, etc.”
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For each contract for which a Schedule A must be filed,
sections 103(a)(2), 103(c), and 103(e)(2) of ERISA and the Department’s
regulations thus impose a legal duty on insurance companies and other
organizations that provide benefits under an ERISA plan, or hold plan assets
in a separate account, to furnish the plan administrator with accurate
information about commissions and fees paid to brokers, agents, and other
persons needed by the plan administrator to complete the Schedule A.
Further, section 501 of ERISA makes it a criminal violation for any person
to willfully violate any provision of Part 1 of Subtitle B of Title I,
including section 103(a)(2), or any Department regulation issued under any
such provision.(3)
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As indicated above, commissions and fees required to be
reported on Schedule A include all commissions and fees directly or
indirectly attributable to a contract or policy between a plan and an
insurance company, insurance service, or similar organization. This includes
commissions and fees paid by an insurance company where the broker’s,
agent’s, or other person’s eligibility for the payment or the amount of
the payment is 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. In that regard, it would not be a permissible reading
of the Schedule A instructions to conclude that payments to a broker or
agent are required to be reported only when they would be considered a “sales
commission” on an individual policy or contract. See Advisory
Opinion 86-17A. Further, non-monetary forms of compensation, such as prizes,
trips, cruises, gifts or gift certificates, club memberships, vehicle
leases, and stock awards, must be reported if the entitlement to or the
amount of the compensation was based, in whole or in part, on policies or
contracts placed with or retained by ERISA plans. Separate fee and
commission information is required for the Schedule A, even if premiums for
the contract or policy are paid from the general assets of the employer or
the policy is held in the name of the employer sponsoring the plan. The fact
that a broker or agent signs on behalf of an insurance company would not be
a basis for failing to report fees and commissions attributable to the
contract or policy on a Schedule A. Nor would the fact that fees and
commissions are paid from a separate bonus fund, and not directly from the
insurance company’s general assets, provide a basis for not reporting the
fees and commissions. Similarly, classifying fees or commissions
attributable to a contract or policy as “profit-sharing” payments,
delayed compensation, or as “reimbursements” for various marketing or
other expenses would not justify a failure to disclose such amounts. Finder’s
fees and other similar payments made by a third party to brokers, agents,
and others in connection with an insurance policy would be required to be
disclosed by the insurer where 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.
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Insurers must provide plan administrators with a
proportionate allocation of commissions and fees attributable to each
contract for which a Schedule A must be filed. In satisfying that
obligation, any reasonable method of allocating commissions and fees to
policies or contracts is acceptable, provided the method is disclosed to the
plan administrator. An allocation method that 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 is not
reasonable. For example, it would not be reasonable to allocate commissions
or fees across all policies where that would include policies that did not
contribute to the recipient’s eligibility for or to the amount of the
commission or fee payment. Similarly, it would not be a reasonable
allocation to declare 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. In light of the fact that insurers may keep records regarding
fees and commissions paid to brokers, agents, or others on a calendar year
basis for tax reporting purposes (e.g., issuing IRS Form 1099 or IRS Form
W-2 to the recipients), a reasonable allocation method could, in the
Department’s view, allocate fees and commissions to a Schedule A based on
a calendar year calculation even if the plan year or policy year was not a
calendar year.
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It is also the view of the Department that the terms “general
agent” and “manager” as used in the Schedule A instructions do not
include brokers representing insureds. Further, for payments to a “general
agent” or “manager” to be exempt from Schedule A reporting, they must
only be for “managing an agency” or for “performing other
administrative functions” for the insurer. Amounts paid to a general agent
or manager would be required to be reported on the Schedule A 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.
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Finally, we note that records required to be retained
under section 107 of ERISA include records necessary to verify, explain, or
clarify, and check for accuracy and completeness, any information required
to be certified to the administrator under ERISA section 103(a)(2) and 29
C.F.R. § 2520.103-5 by an insurance carrier or other organization described
therein.(4) Because
records regarding fees and commissions required to be reported on the
Schedule A are necessary to the verification, explanation or clarification,
and the checking for accuracy and completeness, of information contained in
the Form 5500 annual report, insurers required to certify fee and commission
information to plan administrators must keep the records described in
section 107 at least for the requisite six year period set forth in section
107.
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This letter constitutes an advisory opinion under ERISA
Procedure 76-1, and is issued subject to the provisions of that procedure,
including section 10 thereof relating to the effect of advisory opinions.
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Very truly yours,
John J. Canary
Chief, Division of Coverage, Reporting and Disclosure
Office of Regulations and Interpretations
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For example, in the case of a welfare
benefit plan covering fewer than 100 participants at the beginning of
the plan year that meets the conditions in 29 C.F.R.§ 2520.104-20, the
plan administrator is exempt from the requirement to file a Form 5500
annual report for the plan.
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The Schedule A instructions correlate
the reporting of fees and commissions on Schedule A to the requirement
to report indirect compensation on Schedule C. Specifically, the
Schedule A and Schedule C instructions provide that insurance fees and
commissions listed on the Schedule A also must be reported on the
Schedule C by administrators required to file the Schedule C as indirect
compensation paid by the employee benefit plan unless the only
compensation to an agent, broker, or other person in relation to the
plan consists of insurance fees and commissions listed on the Schedule
A. In that regard, the Schedule C instructions state that indirect
compensation includes, among other things, payment of “‘finder’s
fees’ or other fees and commissions by a service provider to an
independent agent or employee for a transaction or service involving the
plan.”
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Section 501 provides that “[a]ny
person who willfully violates any provision of part 1 of this subtitle,
or any regulation or order issued under any such provision, shall upon
conviction be fined not more than $100,000 or imprisoned not more than
10 years, or both; except that in the case of such violation by a person
not an individual, the fine imposed upon such person shall be a fine not
exceeding $500,000.”
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Section 107 provides, in relevant
part, that: “[e]very person subject to a requirement to file any
report or to certify any information therefor under this title or who
would be subject to such a requirement but for an exemption or
simplified reporting requirement under section 104(a)(2) or (3) of this
title shall maintain records on the matters of which disclosure is
required which will provide in sufficient detail the necessary basic
information and data from which the documents thus required may be
verified, explained, or clarified, and checked for accuracy and
completeness, and shall include vouchers, worksheets, receipts, and
applicable resolutions, and shall keep such records available for
examination for a period of not less than six years after the filing
date of the documents based on the information which they contain, or
six years after the date on which such documents would have been filed
but for an exemption or simplified reporting requirement under section
104(a)(2) or (3).”
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