Department of Labor Clarifies the Reporting of
Fees & Commissions on Form 5500:

The Schedule A (Form 5500) Information You Received
From Your Insurance Company May Not Be Accurate

In response to allegations that some insurance companies have been underreporting commission and fee payments to brokers and agents, the Department of Labor (DOL) has issued an advisory opinion clarifying its views regarding the current Schedule A reporting requirements.

What’s the Bottom Line?

The insurance company that provides benefits under your ERISA benefit plan must provide you with fee and commission information to be reported on Schedule A.  According to DOL Advisory Opinion 2005-02A, fees and commissions that must be disclosed include those that are based in any way on the value of the insurance policy issued to the plan.  This includes sales commissions, non-monetary rewards (prizes, trips, gift certificates), finder’s fees, and fees and commissions classified as “profit-sharing” payments, delayed compensation, or “reimbursements” for marketing expenses.

Your insurance company is required under ERISA to provide you with this information within 120 days after the end of the plan year (this would be April 30 for benefit plans that are on a calendar year plan year); if you have not yet received this information from your insurance carrier, contact them.  Insurance companies have a legal duty under ERISA and the DOL regulations to furnish plan administrators with accurate information about commissions and fees paid to brokers and agents; failure to do so is a criminal violation.

This information should then be used as part of your annual review of fees and expenses to determine "reasonableness".  Plan fiduciaries should evaluate the services provided by the commissioned broker with respect to the amount paid by the plan in commission income.  Documentation of this evaluation should be maintained in a file.

Background

The plan administrator of any ERISA-covered employee benefit plan is required to file an annual report using the Form 5500 (although certain "small" ERISA plans are exempt from filing).  If any benefits under the plan are provided by an insurance company, insurance service, or similar organization, the plan administrator must include with the annual report a Schedule A (“Insurance Information”).  The Schedule A is used to disclose the amount of commissions and fees that are paid to brokers, agents, and other persons who received direct or indirect compensation from the plan during the year.  The names and addresses of the agents and brokers, the nature of the agents’ and brokers’ services to the plan, and the agents’ and brokers’ relationship to the plan administrator must also be disclosed on the Schedule A.  Separate Schedule A’s must be filed for each insurance contract.

Plan administrators must rely on the insurance company to provide the information necessary to complete the Schedule A.  In fact, the DOL regulations require insurers to provide this information and certify that the information is accurate and complete (29 C.F.R. § 2520.130-5).

The Schedule A, the related instructions, and prior guidance from the DOL describe what fee and commission amounts must be reported.  Generally, commission amounts do not need to be reported "in the case of a person whose compensation is minimal … and who performs solely ministerial duties" (ERISA Section 103(c)).  Also, compensation paid to a "general agent" or "manager" for "managing an agency, or for performing other administrative functions" do not need to be reported either.  Other than these limited exceptions, however, most sales commissions and fees must be disclosed on the Schedule A.  Nevertheless, questions have still arisen as to exactly what should be reported, prompting the DOL to issue the advisory opinion.

Commissions and Fees That Must Be Reported by the Insurer

In Advisory Opinion 2005-02A, the DOL clarifies that commissions and fees required to be reported on Schedule A include those that are

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.

Further, non-monetary forms of compensation (prizes, trips, cruises, gifts, gift certificates, etc.) must be reported if the compensation was based, in whole or in part, on policies or contracts placed with or retained by ERISA plans.  In addition, separate fee and commission information is required for the Schedule A, even if premiums for the contract or policy are paid from the employer’s general assets or the policy is held in the name of the plan sponsor.  Finder's fees and other payments made by a third party to agents or brokers in connection with such an insurance policy must also be disclosed if the insurer reimburses the third party for the payment.

The DOL explains in its advisory opinion that fees and commissions must be reported on a Schedule A even if:

·        a broker or agent signs on behalf of an insurance company;

·        the fees and commissions are paid from a separate bonus fund and not directly from the insurance company's general assets; or

·        fees and commissions attributable to a contract or policy are classified as "profit-sharing" payments, delayed compensation, or as "reimbursements" for various marketing or other expenses.

 

For additional information, please call or e-mail your contact in the Employee Benefits Group at Ice Miller.