Unveiling the Risks of Bundled Pricing
In the complex landscape of employee benefits, bundled pricing is often seen as a convenient solution for large employers. However, this convenience can sometimes mask significant financial risks and compliance challenges. This article delves into the complexities of bundled pricing, especially the practice of commission cross-subsidization, and its impact on both employer compliance and employee satisfaction.
The Deceptive Simplicity of Bundled Pricing
Bundled pricing arrangements might seem attractive due to their lower upfront costs and administrative ease. Yet, these setups can obscure the true financial cost of each individual insurance offering, potentially leading to decisions that do not align with the best interests of the employer or employees. It is crucial for employers to advocate for standalone pricing for each coverage line to ensure transparent financial reporting and make informed business decisions based on accurate data.
Illustrative Example: Misaligned Pricing and Compliance Risks
Consider the scenario where a large life and disability insurance company offers to lower rates on company-paid insurance coverages in exchange for bundling these with voluntary benefits. This offer implies that significant profits from employee paid voluntary benefits will subsidize the below-market pricing for the company paid coverages. Such arrangements should raise red flags among benefit professionals because this practice obscures the true cost of each coverage and undermines fair pricing practices. If these coverages are subject to the Employee Retirement Income Security Act (ERISA), this practice could result in regulatory problems.
Commission Cross-Subsidization: A Hidden Challenge
Commission cross-subsidization further complicates bundled pricing. Employers might find that employer-paid insurance lines have commissions of 10% or less, sometimes even 0%, while employee-paid “voluntary benefits” can have commissions ranging from 20% up to 65%. This discrepancy can significantly impact the perceived and actual value of the benefits and the services provided. In addition, if these coverages are subject to ERISA, such disparity could give rise to a breach of fiduciary duty as well as a non-exempt prohibited transaction.
Navigating Compliance and Legal Challenges
Ignoring these discrepancies is not feasible, particularly when considering compliance with laws like ERISA. If voluntary benefits are endorsed by an employer, including communicating their availability through the employer’s benefits system, these should be included in regulatory filings, such as the Internal Revenue Service (IRS) Form 5500, to ensure full transparency and legal compliance.
Actionable Best Practices for Employers
Employers should consider implementing the following practices to manage the risks associated with bundled pricing effectively:
● Demand Transparency: Request clear, separate pricing for each line of insurance.
● Insist on Detailed Reporting: Ensure regular, detailed financial reports on premiums, claims, and expenses for each insurance line.
● Review Commission Structures: Evaluate whether the commission rates are justified by the insurance coverages, the actual coverage amounts, and the service levels provided and ensure they are consistent with industry standards.
Empowering Your Organization Through Knowledge
Understanding the nuances of bundled pricing in employee benefits is essential for ensuring that your benefit strategy is both effective and compliant. By focusing on transparency and informed decision-making, employers can protect their organizations and provide a more equitable benefits environment for their employees.
Engage with Our Resources:
Take the first step towards better benefit management by reviewing our helpful resources, designed to help CFOs and Human Resources Leaders navigate these complex issues.
Further Reading:
For additional insights into ERISA compliance and best practices, visit the U.S. Department of Labor’s guide to health benefits under federal law.