There is a sea change coming in how voluntary brokers disclose their compensation, and if they do not prepare for it now, they could face the wrath of the Labor Department, said a speaker at the Workplace Benefits Renaissance conference Tuesday.

“I don’t think you are aware of what is going to come,” warned Marcia Wagner, president and founder of Boston-based The Wagner Law Group, which specializes in ERISA litigation. “Your brethren in the retirement industry are aware, and this is a call for you to get aware of it.”

Speaking at the show, co-sponsored by Employee Benefit Adviser in Atlantic City, N.J, Wagner said as the line between between voluntary and core benefits becomes blurred more and more benefits are falling under ERISA regulations. Voluntary benefits become subject to ERISA for many reasons, including, if they:

  • Negotiate the benefits
  • Subsidize the cost
  • Link coverage to employee status (i.e. full versus part time)
  • Use employer’s name in promotion of the benefit
  • Promote voluntary alongside core
  • Recommend voluntary benefits
  • Assist employees with claims and disputes

Further, 408(b)(2) regulations, which were finalized in July and effective now, are coming to welfare benefits, Wagner said. “ERISA is a very interesting status. It is illegal for a plan to engage in a sale or exchange with a party in interest,” for example, a broker, she added. “If that were the true definition, there would be no private welfare marketplace. There is an exception that eats up the role.”

That exception allows sales of products using employee or employer money under ERISA if the contract is reasonable, if the compensation is reasonable and if the services are necessary or desirable.

If those conditions are not met, a broker and employer could be jointly liable, Wagner said. “If you know your employer clients don’t know what they are paying for because you sell it to them without proper disclosure, you are equally ... liable for breach,” she explained.

As the DOL prepares for an upsurge in audits, Wagner suggests looking over client contracts now to clean them up. “There is no boilerplate,” Wagner explains. “They are usually ‘exhibit A’ in lawsuits.”

Among the penalties the Labor Department can levy for violations are a 20% civil penalty, $100,000 and 10 years in jail criminal penalty for an individual, $500,000 and 10 years in jail for a corporation, and broad authority to subpoena.

Wagner believes the Labor Department is looking to make an example of a broker in violation of these rules as they set up enforcement, so best practices should be implemented now.

Those best practices include:

  • Maintaining a stand-alone ERISA policy
  • Internally tracking all clients subject to ERISA
  • Formalizing the protocol for fee disclosure
  • Managing ‘model’ client contracts
  • Ensure all clients’ services are signed
  • Confirming referrals are fully disclosed
  • Providing ongoing training/education

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