|As seen in the February 2020 issue of PEO Insider magazine. PEO Insider is published by NAPEO (The National Association of Professional Employer Organizations) and is the leading publication dedicated solely to the PEO industry.
What you need to know: Getting a Master Health Plan.
Your PEO is flourishing, and you are looking for new ways to expand your business and your footprint. One ongoing topic of conversation with your leadership team is the possibility of starting a master plan. The benefits seem to be there. You create a stickier and more profitable business by providing more and better services to your clients. Your clients get large-company benefits and access to a broader range of healthcare options that you manage for them, along with a myriad of other services (administrative and fiduciary), simplifying their lives while building a partnership that lays the groundwork for a long-term relationship.
Getting Started with a Master Plan
There are numerous options for the expanded and improved services a master plan can bring, so before you begin, you must align on what you want to provide under your master plan.
You can provide comprehensive or limited services. You will provide some services under a master plan, even if the plan only provides healthcare. These services may include facilitating open enrollments, drafting and distributing summary plan descriptions (SPDs) and other plan-mandated disclosures, actuarial services related to pricing of coverage, and preparation of the annual Form 5500. Will you use in-house or third-party resources? What resources will you need in terms of funding the plan and internal staffing? Some master plans miss this next issue entirely: How do you get reimbursed for administering the plan? This isn’t as straightforward as setting an administrative fee. This is because the Employee Retirement Income Security Act (ERISA) generally prohibits a PEO as sponsor and named fiduciary of the PEO-sponsored, or master, plan from receiving consideration in connection with the plan. One notable exception to this prohibition, as described in greater detail below, is that ERISA allows a plan sponsor/named fiduciary—such as a PEO with respect to its master plan—to charge “allowable” expenses. However, this concept under ERISA must be closely adhered to. Otherwise, a PEO runs a material risk of running afoul of certain other rules, including ERISA’s prohibited transactions or fiduciary provisions.
Here is a more comprehensive list of some examples of services your PEO may choose to provide in connection with the master plan. This is by no
means an exhaustive list:
- Negotiate benefit plans upfront with insurance carriers:
- Set contribution rates for new and existing clients to balance participant risk profiles regarding the plan;
- Prepare insurance renewal analysis for the plan to maximize coverage while reducing client costs; and
- Track and reconcile commissions with respect to the plan.
These activities are managed on behalf of clients, which can generate fees:
- Billing audit services related specifically to the plan (versus just other non-plan PEO services);
- Premium reconciliation services related to the plan;
- Data exchange services with insurance carriers/carrier feeds with respect to the plan;
- Preparation of Form 5500 and other plan-mandated government filings;
- Preparation of SPDs and other plan-mandated participant disclosures; and
- Provision of employee web portals for plan enrollment and plan-related information.
Selecting the range of services and benefits you will provide may seem relatively straightforward. However, you must consider your existing and potential clients’ needs, the internal staffing required, and ultimately your desired scope of services (and burden).
What is an allowable expense? What is self-dealing?
Two simple questions, with very un-simple answers.
As to “what is an allowable expense?” the answer turns on whether the expense was “necessary” for the administration of the plan and whether the expense amount was “reasonable.” The Department of Labor (DOL) has set forth a set of rules for determining what is an allowable expense. Notably, overhead costs such as rent, utilities, etc., are generally not allowable expenses. The rules are detailed and very fact-specific, so don’t wait until your business is audited to learn them.
As for self-dealing, this happens when certain entities, called parties-in-interest, “do business” with the plan for their own benefit. Notably, the employer, the plan fiduciaries, service providers, and statutorily defined owners, officers, and relatives of parties-in-interest are all parties-in-interest for purposes of these rules—as is a PEO in its capacity as sponsor and named fiduciary of its PEO-sponsored master plans. To the extent that a party-in-interest receives remuneration directly or indirectly with respect to a related plan, this generally can give rise to a self-dealing violation and what is called a “prohibited transaction.”
One key example of a prohibited transaction and one frequently seen (making it a target of DOL audits) is when the PEO itself receives captive commission revenue or the like. Because the PEO is a party-in-interest, this generally can result in a self-dealing violation or a prohibited transaction. There are consequences to self-dealing. They include:
- Personal liability for the named fiduciary and/or the plan administrator. This liability is equal to the extent of consideration received by the PEO (e.g., the commissions) (“amount involved”); and
- A 20 percent excise tax on the amount involved, as well as an interest charge associated with the lost earnings to the plan.
The good news is that under ERISA, you are allowed to offset reasonable administrative expenses through fees or commissions—but it needs to be done carefully and lawfully. This would include, perhaps, properly documenting and accounting for all allowable expenses, only retaining commission revenue up to the aggregate amount of your allowable expenses, and also ensuring that these expenses are at or below what the same suite of services would cost on the market if the PEO were instead to use a third party. Please keep in mind that an ERISA independent fiduciary and/or an ERISA attorney can help in this area.
What is a Fiduciary and why do I need one?
Prohibited transactions, reasonable expenses. How do you know what you should and shouldn’t do? You hire or employ a fiduciary. Fiduciaries are subject to standards of conduct because they are required by ERISA to act solely in the interest of participants (and their beneficiaries). This could be an in-house person, such as your director of benefits or controller, or someone else at your organization who knows the ins and outs of ERISA rules and constantly stays current with legislative updates. Or, you could hire an outside expert who acts as the plan fiduciary and takes full liability for the plan’s adherence to ERISA laws.
It’s important to know that whether or not you’ve named an internal fiduciary or instead selected an external fiduciary, you must have one with respect to each of your ERISA-covered PEO-sponsored plans. If you have a master plan, you (or some person or group of persons in your organization) are likely acting as a fiduciary. Administering/managing a plan or controlling the plan’s assets equals being a fiduciary. Of course, it is important to keep in mind that fiduciary status is based on the functions performed for the plan, not the title. Thus, you may have multiple fiduciaries based on how many people perform the functions in support of the plan, and each has personal liability to that plan.
The burdens of sponsoring and administering a master plan are not inconsequential. However, the benefits of being able to offer a master plan, both for your PEO and your clients, may far outweigh the effort. Not only are you providing even more valuable services for your clients (building on your partnership for long-term success), but it can also increase your profitability. It’s a win-win. The three primary considerations are:
- What services will you provide,
- how will you provide and distribute those services, and
- how will you ensure adherence to the ERISA rules (a knowledgeable fiduciary)?
If you would like to speak with one of our consultants about anything discussed in this PEO Insider article please contact us. We’d like to hear from you!
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