January 25, 2018 – The Department of Labor (“DOL”) recently announced that April 1, 2018 would be the effective date for employee benefit plans to comply with the final rule under the Employee Retirement Income Security Act (“ERISA”) concerning claims for disability benefits (the “Final Rule”). Claims for disability benefits filed after April 1, 2018 are subject to the Final Rule, and employers should take steps now to ensure that new procedural requirements are satisfied.
Which Plans Are Covered?
The Final Rule applies specifically to ERISA-covered employee benefit plans that provide disability benefits and for which a plan fiduciary (such as a trustee or administrator) has discretionary authority to determine whether an employee is “disabled” under the terms of the plan. Plans which rely on an external entity, such as the Social Security Administration or the employer’s long-term disability insurer, to make the disability determination are not subject to this Final Rule. Covered retirement-type plans include (a) ERISA-covered qualified retirement plans, such as pension plans and 401(k) plans; (b) ERISA-covered 403(b) plans; (c) “top hat” non-qualified deferred compensation plans; and (d) 457(b) plans maintained by tax exempt entities. For these retirement-type plans, the determination that a participant is disabled can result in accelerated vesting, allocations for the year of disability, continued accrued benefits, and enhanced distribution rights. The Final Rule also applies to ERISA-covered health and welfare plans that provide disability benefits (such as short-term and long-term disability plans). However, for ERISA-covered fully insured health and welfare plans, where the insurer is the claims reviewer, the burden for compliance will fall primarily on the insurer, not the employer. In such instances, the employer should ensure that the insurers (and insurance policies) will abide by and follow the Final Rule. For short-term disability plans not covered by ERISA, the Final Rule will not apply, but employers should take care to ensure that such plans are not covered by ERISA.
Requirements Under the Final Rule
The Final Rule includes the following changes in the requirements for processing claims and appeals for disability benefits:
- Avoiding Conflicts of Interest. Plans must ensure that disability benefit claims and appeals are adjudicated in a manner designed to ensure the independence and impartiality of the persons involved in making the disability decision. For example, a claims adjudicator or medical or vocational expert could not be hired, promoted, terminated or compensated based on the likelihood that the adjudicator or expert will support the denial of benefits. The employer should consider carefully whether the employer will be sufficiently free from conflicts of interest to make the disability determination itself.
- Expansion of Disclosure Requirements. The Final Rule requires the following information be included in both the initial denial notices and appeal denial notices:
- Explanation of Reasons for Denial. Benefit denial notices must contain a more complete discussion of why the plan denied a claim and the standards used in making the decision. For example, the notices must include a discussion of the basis for disagreeing with the views of a participant’s treating health care professional or disagreeing with a disability determination made by the Social Security Administration if presented by the participant in support of his or her claim.
- Statements Regarding Claim File and Internal Protocols. Benefit denial notices must include a statement that the participant is entitled to receive, upon request, the entire claim file and other relevant documents and also must include the internal rules, guidelines, protocols, standards or other similar criteria of the plan that were used in denying a claim, or a statement that none were used.
- Contractual deadlines. Benefit denial notices must describe any plan-imposed deadline for filing a lawsuit based on the denial, including specifying the calendar date on which such plan-imposed deadline expires for the claim. So, if a plans imposes its own statute of limitations for claims, the denial notice must describe that provision.
- Notices Written in a Culturally and Linguistically Appropriate Manner. Benefit denial notices must be written in a culturally and linguistically appropriate manner in certain situations. Specifically, if a disabled participant’s address is in a county where 10 percent or more of the population is literate only in the same non-English language, benefit denial notices must include a prominent statement in the relevant non-English language about the availability of language services. The plan is also required to provide a verbal customer assistance process in the non-English language and provide written notices in the non-English language upon request.
- Right to Review and Respond to New Information Before Final Decision. Plans may not deny benefits on appeal based on new or additional evidence or rationales that were not included when the benefit was denied at the claims stage, unless the participant is provided a copy of any new or additional evidence or rationale and is given a fair opportunity to respond. Providing notice to the participant that such information is available upon request is not sufficient.
- Deemed Exhaustion of Claims and Appeal Processes. If plans do not adhere to all claims processing rules, the participant is deemed to have exhausted the administrative remedies available under the plan, unless the violation was the result of a minor error and other specified conditions are met. If the participant is deemed to have exhausted the plan’s administrative remedies, the claim or appeal is deemed denied without the exercise of discretion by a fiduciary, and the participant may immediately pursue his or her claim in court. The court can review the claim or appeal without providing any deference to the administrator’s determination. Also, if a court subsequently rejects the participant’s request for review on appeal, the plan must treat a claim as re-filed.
- Certain Coverage Rescissions are Adverse Benefit Determinations Subject to the Claims Procedure Protections. Rescissions of coverage, including retroactive terminations due to alleged misrepresentation of fact (e.g. errors in a participant’s application for coverage), must be treated as adverse benefit determinations, thereby triggering the plan’s appeals procedures. Rescissions for non-payment of premiums are not considered adverse benefit determinations subject to the Final Rule.
Next Steps for Employers
Employers should review their ERISA-covered health and welfare plans, retirement plans, and deferred compensation arrangements, including summary plan descriptions and other employee plan communications, to ensure compliance with the Final Rule. Certain group health plans that also provide disability benefits may find that the procedures used for disability benefit claims are similar to group health plan procedures already in place. Alternatively, for employers that find the Final Rule too onerous, they may have the option to amend the definition of disability in their plans to require determination by an external entity such as the Social Security Administration or the employer’s long-term disability insurer to eliminate any subjective discretion on their part to determine whether employees have become disabled (but, keep in mind that the existing definition in a retirement plan may be a protected benefit or a contractual right that must be preserved). If you have any questions about this Client Advisory, please contact a member of our Employee Benefits Group.
Sherman & Howard has prepared this advisory to provide general information on recent legal developments that may be of interest. This advisory does not provide legal advice for any specific situation and does not create an attorney-client relationship between any reader and the Firm.