Broker Compensation and Fiduciary Duty: How the Money Works and Where the Law Is Moving

The broker recommends a level funded plan administered by TPA X with stop loss from Carrier Y. The employer asks: how much do you make on this? The answer depends on who is doing the asking, what the broker is willing to disclose, and whether the broker is providing the full picture of direct commissions, indirect overrides, production bonuses, retention incentives, and noncash compensation flowing from TPA X, Carrier Y, and their affiliates.

Since December 27, 2021, when Section 202 of the Consolidated Appropriations Act took effect, the broker has been legally required to disclose all of it. Whether the broker actually does, whether the employer can interpret the disclosure, and whether the disclosure resolves the underlying conflict are three separate questions, each with a different answer.

How the Money Works

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The base commission is the visible layer. For small group health plans under 100 lives, carriers commonly pay broker commissions as a per-employee-per-month (PEPM) amount, typically ranging from $20 to $50 PEPM depending on the carrier, the product, and the group size. Some carriers structure the commission as a percentage of total premium, typically 3 to 6 percent. The carrier embeds the commission in the rate. The employer does not write a separate check. The commission arrives monthly for as long as the group remains enrolled. This structure means the broker earns a predictable recurring revenue stream from each placed group. An Aetna fully insured quote for a 25-person group might embed a $30 PEPM commission, producing $9,000 annually. A level funded quote from a regional TPA for the same group might embed a $25 PEPM commission, producing $7,500 annually. A level funded quote from UnitedHealthcare Level Funded might embed $35 PEPM, producing $10,500 annually. The commission varies by carrier, not by product category, which means the incentive structure does not uniformly favor fully insured over level funded or vice versa.

Overrides are the second layer. A TPA or stop loss carrier may pay an additional PEPM or percentage to the broker based on total production volume. A broker who places 500 lives with a single TPA may receive an override of $3 to $8 PEPM on the entire block, producing an additional $18,000 to $48,000 annually on top of base commissions. The override creates an incentive to concentrate business with the override-paying TPA, which may or may not produce the best outcome for any individual employer in the broker’s book.

Production bonuses are the third layer. A stop loss carrier may offer a lump-sum bonus triggered by hitting a production threshold: $10,000 for placing 1,000 new lives in a plan year, for instance, or $5,000 for retaining 90 percent of existing business at renewal. A general agency that distributes for multiple TPAs may layer its own bonuses on top of the carrier’s. The production bonus creates an incentive to hit the threshold, which may mean placing a borderline group with the bonus-paying carrier rather than with the carrier whose terms better fit the group’s risk profile.

Retention bonuses compound the concentration incentive. A carrier that pays a 2 percent retention bonus on renewed premium gives the broker a financial reason to recommend renewal with the incumbent even when a competitor offers better terms. The employer sees a renewal recommendation. The employer does not see the retention bonus influencing it.

Consulting fees represent a structural alternative. Some brokers charge the employer a flat annual consulting fee and rebate or forgo carrier commissions. The fee model is presented as reducing conflicts because the broker’s compensation comes from the employer rather than from the product vendor. In practice, some brokers collect consulting fees on top of commissions, not instead of them. The Plante Moran Group Benefit Advisors team has documented that some agencies collect both consulting fees and indirect compensation, and that for some broker organizations, indirect or contingent compensation sources represent a significant portion of total revenue.

Revenue-sharing and equity arrangements occupy the deepest layer. In some structures, the broker holds an equity interest in the TPA or receives a share of the TPA’s revenue on placed business. This is less common than commission-based compensation but represents the most entangled form of financial alignment between a broker and a specific product. An employer evaluating a recommendation from a broker who holds equity in the recommended TPA is evaluating a recommendation from an investor, not an independent advisor.

The Fiduciary Question

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ERISA Section 3(21) defines a fiduciary as any person who exercises discretionary authority or control over plan management, exercises authority or control over plan assets, or renders investment advice for a fee. Section 406 prohibits transactions between a plan and parties in interest, including service providers. Section 408(b)(2) provides an exemption for reasonable service arrangements at reasonable compensation. The CAA’s Section 202 amended this exemption for group health plans, requiring brokers and consultants to disclose their compensation as a condition of the exemption’s availability.

The practical question is whether a broker who recommends a level funded plan is a fiduciary. The answer turns on the nature of the broker’s role. A broker who merely presents options and processes enrollment is generally a vendor, not a fiduciary. A broker who exercises discretion in recommending a specific plan, evaluating TPA quality, designing the plan structure, and managing the ongoing relationship is performing functions that meet the Section 3(21) definition of discretionary authority. The distinction is functional, not contractual. A broker agreement that disclaims fiduciary status does not control the analysis if the broker’s actual conduct constitutes the exercise of fiduciary functions.

The litigation trajectory has sharpened this question. In late 2025, Schlichter Bogard LLC filed a series of class action lawsuits against major employers and their brokers, including Mercer, Lockton, Gallagher, and Willis Towers Watson, alleging ERISA fiduciary breaches related to voluntary benefit programs. The lawsuits named the brokers as defendants and alleged they acted as functional fiduciaries who prioritized their own commissions over participants’ interests. The Braham v. Laboratory Corporation of America case and the Fellows v. Universal Services of America case both alleged that the broker exercised discretion in administering benefit programs and selectively withheld information about lower-cost alternatives to maximize compensation. In one case, plaintiffs alleged over $33 million in excess broker commissions across the plan.

These cases are not level funded cases specifically. They target voluntary benefits. But the legal theories apply with equal force to any ERISA plan arrangement where the broker exercises discretionary authority over plan management and receives compensation from the product vendors whose products the broker recommends. A level funded plan administered under ERISA, where the broker recommends a specific TPA, evaluates stop loss terms, designs the plan structure, and receives commissions from the TPA and the stop loss carrier, presents the same structural conditions that the Schlichter Bogard lawsuits target.

Separately, the Supreme Court’s 2024 decision in Cunningham v. Cornell University shifted the burden of proof in prohibited transaction cases, requiring plan sponsors to demonstrate that their processes for evaluating service provider compensation were prudent. Encore Fiduciary’s analysis of 2025 ERISA litigation found that 155 fiduciary class lawsuits were filed, with 35 (22 percent) involving health plans, the largest subcategory after defined contribution plans. The health plan share is growing.

Where Disclosure Does Not Resolve the Conflict

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Section 202 of the CAA requires covered service providers to disclose, in writing and in reasonable advance of contract execution, all direct and indirect compensation exceeding $1,000 that the broker expects to receive. The disclosure must describe the services to be provided, the broker’s fiduciary status if applicable, all direct compensation by service or in the aggregate, all indirect compensation including overrides and incentives not solely related to the covered plan, and the arrangement under which indirect compensation is paid. Failure to provide the disclosure means the service arrangement does not qualify for the Section 408(b)(2) exemption, converting it into a prohibited transaction subject to excise taxes of 5 percent of the amount involved, rising to 100 percent if not corrected within 90 days of DOL notice.

The disclosure requirement is real. The enforcement is developing but not dormant. The DOL’s Field Assistance Bulletin 2021-03 provided initial relief and guidance, and enforcement actions have begun. Plan fiduciaries who do not obtain the required disclosures face their own liability for breach of fiduciary duty (LFP-03.04).

The structural problem is that disclosure does not resolve the conflict. The owner of a 20-person company who receives a Section 202 disclosure showing that the broker earns $30 PEPM in base commission from TPA A, a $5 PEPM override for volume concentration, a $5,000 production bonus for hitting a threshold with Stop Loss Carrier B, and a 2 percent retention bonus on renewed premium has received information. That owner has not received the analytical capacity to evaluate whether the compensation structure influenced the recommendation. The disclosure transfers data. It does not transfer expertise.

The employer who lacks actuarial literacy, TPA evaluation methodology, and stop loss market knowledge (which describes most employers with 10 to 50 employees) cannot determine from a compensation disclosure whether the broker’s recommendation would have been different under a fee-only compensation model. The employer can see the numbers. The employer cannot assess the counterfactual. Disclosure creates a record that may matter in litigation. It does not create the informed purchaser that the market requires for competitive pressure to discipline broker conduct.

Where the Law and the Market Are Moving

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The trajectory points in one direction: toward greater transparency and broader fiduciary exposure for brokers who serve ERISA health plans.

The litigation volume is increasing. The Schlichter Bogard lawsuits of late 2025 targeted four major employers and their brokers simultaneously, a pattern drawn from the firm’s successful campaign against excessive fees in 401(k) plans. Between 2016 and 2023, plaintiffs’ lawyers filed over 460 excessive fee lawsuits against retirement plans, producing settlements ranging from $200,000 to $124.6 million. The extension of these theories to health plans is not speculative; it is occurring. The Hecht v. Cigna case, which survived a motion to dismiss in February 2025 for ERISA fiduciary breach related to provider network failures, and which settled for approximately $6 million by October 2025, established that health plan administration failures can sustain fiduciary breach claims.

The CAA disclosure requirements create a documentary record that plaintiffs’ attorneys will use. A broker who disclosed an override structure and then recommended the override-paying TPA over a demonstrably superior alternative has created evidence for a fiduciary breach claim. A broker who failed to provide the disclosure at all has created a prohibited transaction that requires no further analysis.

The market pressure follows the regulatory pressure. Employers who understand the disclosure data, beginning with larger and more sophisticated employers and moving down-market as litigation awareness spreads, will demand fee-based or flat-fee compensation that reduces structural conflicts. The consulting fee model, properly implemented with commission rebates and full indirect compensation transparency, addresses the structural conflict. The broker practices that restructure compensation proactively will have a competitive advantage when the employer’s expectation shifts from “tell me what plan to buy” to “show me your compensation structure and explain how it does not influence your recommendation.”

The brokers who treat Section 202 compliance as a paperwork exercise are underpricing the trajectory. The brokers who treat it as an opportunity to demonstrate independence by restructuring compensation, eliminating or disclosing overrides, and providing fee-based advisory are positioning for where the enforcement and the litigation are heading.