Advisory Opinion 2005-02A

Dear Messrs. Conger and Browning:

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.

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 Departments views regarding the current Schedule A reporting requirements.

Section 103(a)(2) of ERISA provides, in relevant part, as follows:

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).

Section 103(c) of ERISA provides, in relevant part, as follows:

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.

Section 103(e) provides, in relevant part, as follows:

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. . . .

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:

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 . . . .

Section 104(a)(1) of ERISA and 29 C.F.R. &set;§ 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.

The Departments 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."

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⁾

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.

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.

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.

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.

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.