Labor Department ties PBM fee disclosures to employers’ ERISA exemption

The Labor Department's new pharmacy benefit manager rule gives PBMs the disclosure duty and employers the legal exposure. Under the final rule, published in the Federal Register on Nov. 2 by the Employee Benefits Security Administration, the detailed compensation disclosures are a condition of ERISA section 408(b)(2), the statutory exemption that keeps a plan's service contract from being a prohibited transaction. A large self-insured health plan whose PBM arrangement lacks the disclosures does not qualify for that exemption.

If an exemption's conditions are not met, both the responsible plan fiduciaries who entered the arrangement and the service provider "may be subject to enforcement action by the Department and the imposition of a civil penalty" under ERISA section 502. The rule also closes one possible way around this: a PBM contract needed to run the plan does not escape the requirements "merely because it is signed by a plan sponsor."

The required disclosures go well beyond rebate totals. According to the Labor Department's fact sheet, PBMs must report rebates and other manufacturer payments and show how much is passed to the plan and how much is kept. They must report spread compensation, meaning the gap between what the plan pays and what pharmacies are reimbursed, broken out by drug and pharmacy channel. They must also report pharmacy recoupment, including copay claw-backs and the expected number of those transactions, along with price-protection deals, termination payments, formulary placement incentives and the net price of drugs after rebates and fees.

Amounts must be stated in dollars, with good-faith estimates allowed where an exact figure cannot be determined. On request, the data must be supplied in a machine-readable file that uses industry-standard drug identifiers. In its news release, the department said employers will see what manufacturers, pharmacies and others pay PBMs "for the first time."

The rule is narrower than the statute behind it. Its detailed requirements apply to self-insured plans with 100 or more participants, or plans offered by employers with 100 or more employees, and to providers that expect at least $1,000 in compensation. The rule defines pharmacy benefit management by the work performed, whatever the provider calls itself, and it covers brokers and consultants affiliated with a PBM. Daniel Aronowitz, who heads EBSA, said at a livestreamed announcement that the agency limited the rule to the plans whose fiduciaries are "likely to have resources to analyze the disclosures and take appropriate action," PLANADVISER reported. Service providers to smaller plans and fully insured plans must still meet the statutory disclosure requirements to rely on the exemption, the fact sheet says.

The rule ties these requirements to the contract calendar. Initial disclosures must arrive reasonably ahead of a new contract, renewal or extension, and for renewals the department considers 90 days' notice reasonable. After that, PBMs must report actual compensation within 30 days of each six-month period, or each quarter if the plan asks. If any reported category exceeds the amount in the initial disclosure by 5 percent or more, the PBM must state the overage and explain the reason. The parties can agree to a lower threshold.

The audit provisions give plans leverage over the underlying records. A plan may audit at least once a year and choose its own auditor. The PBM may not restrict the timing or location of the audit or access to the records it needs. The PBM must acknowledge an audit request within 10 business days and generally produce the information within 60 calendar days. That information includes claims and transaction-level data and, subject to reasonable confidentiality agreements, the PBM's contracts with retail pharmacies, drug manufacturers and rebate aggregators. The plan pays the auditor, and the PBM pays the cost of producing the records.

When a PBM fails to comply, the rule gives fiduciaries a way out, but it comes with conditions. Aronowitz calls it the "innocent fiduciary exemption." To rely on it, a fiduciary must seek correction from the provider, notify the department if the failure is not fixed, decide whether to continue or terminate the contract, and document the basis for that decision, according to the fact sheet and PLANADVISER's account. The department has set up an online portal for reporting non-compliance.

Complaints about PBM disclosure go back more than a decade. A 2014 ERISA Advisory Council report, cited in the rule, found that "Plan sponsors uniformly testified about the difficulties in obtaining the disclosure of PBM compensation, and how this interfered with their efforts to negotiate and monitor PBM contracts." The rule cites a Business Group on Health survey in which employers anticipated an 11 to 12 percent increase in pharmacy costs in 2025 into 2026. The department projects the rule could lower drug costs for plans and participants by as much as $22 billion, undiscounted, over 10 years. That is a government estimate. According to the department, self-insured employer plans cover about 90 million Americans.

The rule takes effect Jan. 4, 2027, and applies to plan years beginning on or after July 1, 2027. For plans that run on a calendar year, that would mean January 2028. Until the requirements apply, a temporary enforcement policy in place since Feb. 3, 2026 protects providers and fiduciaries who act on a good-faith reading of the amended statute.

More federal requirements follow. Under the Consolidated Appropriations Act, 2026, PBMs must pass through rebates, fees and other remuneration from drug manufacturers to the plans they serve for plan years beginning on or after Aug. 3, 2028. A new ERISA section 726 adds retrospective reporting on drug spending and utilization from the same date. Employers will therefore receive at least one disclosure cycle under the new rule before the pass-through requirement starts.