Does Free Cafeteria Plan Administration Constitute Rebating?

Cafeteria Plan Administrators offering “Free” administration services in return for selling insurance products earn commissions on insurance policies sold to plan members.  Nothing wrong with that, sounds like a good deal. But are there any regulatory issues?

The Texas Department of Insurance has weighed in, issuing an advisory to “ALL LICENSED THIRD PARTY ADMINISTRATORS” stating in part:

“The acts of “enroller” versus “marketer” must be separate and distinct. An enroller who is working for the administrator who has contracted with the employer, has the advantage of promoting his products at the time of enrollment since he has the enrollee in a captive environment. Additionally, the “enroller” by virtue of the function he is contracted to perform, has privileged information about the enrollee, (such as amounts and types of policies or contributions the enrollee has made, W2 information, salary and hourly information), that gives the enroller an unfair advantage.”

“The functions of the administrator are separate from the acts of an agent. These lines begin to fade during this process to the unsuspecting consumer. Administrators must separate the functions of the “enroller” from those of the “marketer.”

Texas Department of Insurance has issued Commissioners Bulletin B-0004-08 addressing whether insurance companies, agents and/or agencies may provide administrative services to clients without additional charge and noted in part:

“The language of the Insurance Code provisions set out in this bulletin prohibit an insurance company, insurance agent or agency with respect to the sale of health insurance from providing inducements to the sale that are not provided for in the insurance contract.  Because many administrative services are not provided for in the insurance contract, they could constitute valuable consideration and an unlawful inducement or rebate in violation of the Insurance Code, regardless of whether they are provided directly or indirectly by regulated entities.”

When a court interprets a statute, Section 321.005, Government Code, it requires it to ascertain the legislature’s intent. When construing a statutory term, Section 312.002, Government Code, requires words to be “given ordinary meaning.” The ordinary meaning of the work “benefit” includes “advantage” and “useful aid.” The free or reduced cost of Cafeteria Plan administration in exchange for selling insurance policies provides a financial advantage and useful assistance and therefore a “benefit.”

To accept a free or reduced fee cost plan for Cafeteria Plan administration gives the appearance of endorsement for the insurance products that are required to be offered and which are limited to the products offered and sold by the Plan Administrator. Separating the role of the administrator from the role of the enroller often results in broader market choices, better coverage and lower costs for plan members.