On December 19, 2016, the Department of Labor (“DOL”) issued final rules that significantly expand the existing claims procedures applicable to ERISA-covered benefit plans that provide disability or other benefits conditioned upon a finding that a participant is disabled.[1] Since their initial release, the rules’ effective date was delayed several times. The DOL has now announced that there will be no changes to the new rules and no further delays, which means that the new claims procedures will apply to all claims for disability benefits under ERISA-covered plans filed after April 1.
The new procedures track the enhanced procedures required for group health plans that became effective as part of the Affordable Care Act in 2010. The expanded features that are now going to be required as part of disability claims determinations are primarily intended to improve a claimant’s opportunity to receive a full and fair review of his or her claim from the plan administrator and to reduce the increasing incidence of litigation arising out of disability claim denials under ERISA-covered benefit plans.
Which Plans Do the New Rules Affect?
The claims procedures are applicable only to plans where a plan administrator maintains the discretion to determine a claimant’s disability in order to receive benefits. Plans that rely on the Social Security Administration’s (“SSA”) determination of disability or on meeting a threshold under another plan (such as a long-term disability plan) are not subject to the new rules.
Overall, the new claims procedures will apply to certain qualified pension plans, defined contribution plans (401(k), 403(b)), welfare plans, and non-qualified “top hat” deferred compensation plans, where the plan makes an independent determination of a participant’s disability. Long-term disability plans — more specifically, their insurers — will be most affected by the new rules. Short-term disability plans that are funded by an employer’s general assets, and thus qualify as “payroll practices” under ERISA, are exempt from the new rules.
What Changed?
Adverse Benefit Determinations (ABDs) — Scope and Content
Under the new rules, ABDs are defined to include any denial, reduction, or termination of, or a failure to provide or make payment (in whole or in part) for, a disability benefit that has a retroactive effect. This means that a retroactive cancellation of disability coverage after April 1 will be treated as a “denied” disability claim, and therefore subject to the new claims procedures. Rescissions of disability coverage for failure to pay premiums or required contributions are excluded from the scope of the new definition.
1. an explanation as to why the plan disagreed with the health care professionals/vocational experts who treated the claimant or advised the plan;
2. an explanation as to why the plan disagreed with the disability determination of the SSA;
3. either the specific internal rules, guidelines, protocols, standards, or other similar criteria that the plan relied upon in making the adverse determination or, alternatively, a statement that such information does not exist;
4. where the denial is based on medical necessity or experimental treatment (or similar exclusion), either an explanation of the scientific/clinical reason for the denial, applying the terms of the plan to the claimant’s medical circumstance, or a statement that such information will be provided for free upon request;
5. notice that the claimant is entitled to receive, upon request and for no charge, all documents, records, and information relevant to his or her claim; and
6. where a claimant lives in a county in which 10 percent or more of the residents are literate only in the same non-English language, a prominently displayed statement in the non-English language clearly indicating how to access the plan’s language services (access to translators/customer assistance process/requests for communications in the non-English language).
If a plan issues an ABD of an appeal of a denied claim, the ABD must describe any “contractual” limitations period applicable where the claimant desires to bring a lawsuit under ERISA, including the calendar date on which that period will expire for his or her claim.
Claimant’s Right to Act on New Information
During an initial disability claim or pending appeal, claimants will now be entitled to receive, at no charge, new or additional evidence considered, relied upon, or generated by the plan, insurer, or other person making the benefit determination (or at the direction of the plan, insurer, or such other person). The evidence or rationale must be provided as soon as possible and sufficiently in advance of the date on which the notice of the ABD on review is required to be provided to give the claimant a reasonable opportunity to address the evidence or rationale prior to that date.
Conflicts of Interest Protections
The new rules require that decisions regarding hiring, compensation, termination, promotion, or other similar matters with respect to any individual (such as a claims adjudicator or medical or vocational expert) must not be made based upon the likelihood that the individual will support the denial of benefits. In practice, this prohibits a plan from conditioning a bonus to an employee or third-party service provider on the amount of claims that are denied, or hiring a medical expert based on his or her reputation for providing opinions only supporting denial of claims.
Consequences of Failing to Follow the New Rules
If the new rules are not followed, a disability claimant will be deemed to have exhausted all the administrative remedies under the plan. That is, the claimant will no longer be required to continue on with the plan’s claims procedures, and may immediately file a lawsuit under ERISA for relief.
Under these circumstances, the rules deem the claim to have been denied without the exercise of the plan administrator’s discretion. As a result, a court will not apply the more deferential “abuse of discretion” standard that is typically applied to claims determinations made by ERISA plan administrators (where such standard is provided for in plan documents). Instead, a court will apply the de novo standard of review.
Under the new rules, failure to follow the disability claims procedures is excused where the failure is (i) de minimis; (ii) non-prejudicial; (iii) attributable to good cause or matters beyond the plan’s control; (iv) in the context of an ongoing good-faith exchange of information; and (v) not reflective of a pattern or practice of noncompliance.
How to Prepare Plans for the April 1 Compliance Date
Prior to April 1, 2018, sponsors should review all of their ERISA plans and determine which plans provide for benefits in connection with a disability (in addition to the classic long-term disability plan, this could include, for example, a 401(k) plan or non-qualified plan that permits distributions upon a disability). For the plans that provide for benefits in connection with a disability, sponsors should review plan documents, summary plan descriptions (“SPDs”) and related notices/forms to determine whether the plan administrator has the discretion to make disability determinations and is, therefore, subject to the new rules.
If a plan will be subject to the new rules, the plan sponsor may consider changing the disability standard under the plan to one that defers to an “outside” determination, such as the SSA’s determination (subject to compliance with any applicable ERISA anti-cutback rules).
For plans where the administrator will retain the discretion to make disability determinations, the plan sponsor should, prior to April 1, i) ensure that plan administrators and benefits staff are aware of, and will follow, the new rules in practice; ii) update plan documents and SPDs to reflect the new procedures; and iii) update ABD letters, disability claims forms, communications, notices, company intranet, and employee handbooks, and any other source where disability claims procedures are published or otherwise available to employees.
[1] The rules were issued under Section 503 of ERISA.
