Late last year, the U.S. Department of Labor (DOL) finalized updated disability claims regulations for plans covered by Title I of ERISA. The new regulations apply to both health/welfare and retirement plans (qualified and nonqualified) alike. Although “top hat” or executive non-qualified deferred compensation plans are exempt from many of Title I provisions, they are not exempt to these new rules.
The final regulations were to take effect January 1, 2018, but have since been delayed in response to an Executive Order released by President Trump. The order requires agencies to review existing regulations to determine whether they can be repealed, replaced, or modified to make them less burdensome. The regulations are now set to take effect on April 1, 2018.
Action item:Plan sponsors will want to follow developments closely and be prepared to implement the new requirements should they go into effect next year (this could require both plan amendments and new plan internal procedures and controls). These steps should be taken well in advance of the date the new rules take effect so that plans are ready to comply when required to do so. Plan sponsors may want to contact vendors and start internally reviewing and identifying benefit plans, severance arrangements, non-qualified deferred compensation plans and employment agreements that will be subject to the new disability claims requirements, as disability benefits can be found in a wide variety of ERISA covered plans.
Although 401(k) class action fee cases get a lot of press, disability benefit claims continue to be the most heavily litigated area in ERISA. According to the DOL, even though fewer private sector employees participate in disability plans than in group health plans, disability cases dominate the ERISA landscape, accounting for nearly 65% of claims filed. If the new regulations take effect in April, they will affect the way claims and appeals are handled internally, and may provide greater leeway to plaintiffs in bringing these claims before the court. The changes are intended to bring disability claims in line with the procedural changes made to group health plans as amended under the Affordable Care Act. Under the new rules:
Claims and appeals must be adjudicated in a manner designed to ensure independence and impartiality in the persons involved in making the benefit determination;
Benefit denial notices must contain a complete discussion of why the plan denied the claim and the standards applied in reaching the decision, including the basis for disagreeing with the views of health care professionals, or with disability benefit determinations by the Social Security Administration;
Claimants must be given timely notice of their right to access to their entire file and other relevant documents and be guaranteed the right to present evidence and testimony in support of their claims during the review process;
Claimants must be given notice and a fair opportunity to respond before denials at the appeals stage are based on new or additional evidence or rationales;
Plans cannot prohibit a claimant from seeking court review of a claim denial based on a failure to exhaust administrative remedies under the plan if the plan failed to comply with the claims procedure requirements unless the violation was the result of a minor error;
Certain rescissions of coverage are to be treated as adverse benefit determinations triggering the plan’s appeals procedures; and
equired notices and disclosures issued under claims procedure regulation must be written in a culturally and linguistically appropriate manner.
Several of these changes may impact future litigation in this area. The DOL asserts that these changes will provide claimants with full and fair review of claims and appeals. Presumably, these changes will also reduce the number of claims brought before the courts. Certainly, the requirement that a plan administer may not prevent a claimant from seeking court review for failure to exhaust administrative remedies appears to open the door to more proceedings. The regulations suggest that in this instance, a court should apply a de novo standard of review, which is less favorable than the deferential or arbitrary and capricious standards often applied in these cases. Use of the de novo standard allows a court to re-visit the claims with fresh eyes, as opposed to giving deference to the claims administrator’s decision to deny the claim. This alone may provide incentive for claims administrators to ensure timely and accurate reviews. Additionally, the new rules also require claims administrators to explain why they disagree with medical professionals who may have also reviewed the claim. This explanation is now required as part of the administrative record. Plaintiffs who do end up pursuing litigation will be betterequipped, as the additional rules are designed to create a more in depth administrative record for the court to review should the claim ever reach litigation.
Plan sponsors should note that the new claims regulations only apply to plans that administer their own benefit determinations. If benefit determinations are outsourced to a third-party administrator (for example in a fully-insured arrangement), or by another source, (such as the Social Security Administration), then these rules do not apply to the plan sponsor directly. In that case, the insurance company or third party responsible for claims will be subject to these rules.
Plans that administer their own disability benefit determinations should continue to monitor and adjust for changes to these procedures. If you are unsure how your plans will be affected by this change, please reach out to our attorneys for assistance.
© Boutwell Fay LLP 2017, All Rights Reserved. This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us. The information contained in this article is effective as of October 31, 2017.