New Claims Procedure for ERISA Plans: Providing Disability Benefits
In December 2016, the Department of Labor published final regulations in connection with claims procedures for plans providing disability benefits. The regulations were originally scheduled to be effective for claims filed under a plan on or after January 1, 2018, but that date has been delayed until April 1, 2018. The regulations attempt to make more transparent the review of claims for disability benefits, guarantee a full and fair review and offer additional safeguards. The safeguards and procedures set forth in the regulations largely mirror the rules concerning claims under health plans mandated by the Affordable Care Act, and as such, require that plans providing disability benefits must ensure that all claims and appeals for disability benefits are adjudicated in a manner designed to ensure the independence and impartiality of the persons involved in making the decision.
The regulations require improvements in connection with the disclosure to claimants. First, the regulations require adverse benefit determinations on disability benefit claims to contain a “discussion of the decision”, including the basis for disagreeing with any disability determination, and including the basis for disagreeing with any disability determination made by the Social Security Administration or other third party disability payers in connection with another plan. Second, notices of adverse benefit determinations must contain the internal rules, guidelines, protocols, standards or other similar criteria of the plan that were relied upon in denying the claim. Finally, consistent with the current rule applicable to notices of adverse benefit determinations at the review stage, a notice of adverse benefit determination at the initial claim stage must contain a statement that the claimant is entitled to receive, upon request, relevant documents.
The obvious intent and focus of the regulations is to eliminate bias where the decision maker in connection with the review of a claim of disability has a direct or indirect financial interest in the outcome, such as in the case of an insured disability claim. Unfortunately, the scope of the regulations extend beyond the typical long-term disability plan and applies to any ERISA covered welfare or pension plan where a finding of disability may give rise to some right or claim for benefits. In FAQs, the Department of Labor takes the position that if a plan conditions its availability to the claimant upon a showing of disability then the new review procedures apply. For example, a typical 401(K) plan oftentimes will accelerate vesting and provide for an early distribution if the participant becomes permanently disabled. Likewise, most nonqualified deferred compensation plans have the same vesting and distribution acceleration.
Of interest to many employers will be the fact that the FAQs provide that a plan is not subject to the new review regulations where the plan provides a benefit the availability of which is conditioned on the finding of disability made by a party other than the plan (e.g., the Social Security Administration or the employer’s long-term disability plan). Thus, if your nonqualified deferred compensation plan would provide that the participant is 100% vested and entitled to a distribution following a determination by the employer’s LTD plan that the employee is disabled, then the nonqualified plan would not need to have the enhanced claims procedure (obviously, the LTD plan would). Because of the relative infrequency of disability claims under either qualified or nonqualified deferred compensation plans and the relatively slight cost impact (an acceleration of vesting), many employers might elect to consider this route rather than the adoption of the more complex and costly disability claim regulations.
As noted above, the regulations are now not effective until April 1, 2018. There has been substantial speculation for some time in the benefits community that the regulations may be further amended to limit the more comprehensive review procedures to the traditional long-term disability plan. Assuming the regulations will go into effect on April 1, 2018, most employers will want to take some action. A plan could simply amend its appeals procedure to conform to the regulations. We have only seen one draft amendment attempting to do so, and it added four or five pages to the claims procedure provisions. The real impact would be complying with the regulations upon a filing of a disability claim. Although not frequent, conducting a claims review under the new regulations will substantially increase the cost of any disability claims procedure review. In several qualified plans, as discussed above, we have simply amended the plan to provide that a participant is entitled to a disability benefit under the plan if he is found to be disabled under the Federal Social Security Administration. This amendment is typically less than one paragraph in length.
You might wonder what happens if you do nothing. In the first instance, the regulations provide that if a plan fails to adhere to all of the requirements in the claims procedure regulations, the claimant would be deemed to have exhausted his administrative remedy and could proceed directly filing a lawsuit either in state or federal court. Under these circumstances, unlike other ERISA claims, the court would not be required to provide any deference to the fiduciary’s denial of the claim and would review the denial on a de novo basis. Assuming the court finds that the participant is in fact disabled, one could speculate that the court might be more likely to award the participant his attorney’s fees where he was not afforded a fair review at the plan level.
It is also possible that either the Department of Labor or a plan participant could pursue legal action attempting to force the employer to amend its plan to adopt a new claims procedure. In our mind, it would be unlikely that the plan participant would do so since he is most likely better off skipping the internal claims review and going directly to court. Obviously, most employers would prefer to force the participant into the internal claims procedure provisions of the plan.
We will keep you posted should we see additional developments in this area. In the interim, please do not hesitate to contact one of our lawyers should you have additional questions or have a plan which needs amended.
This article was written by Mike Foster. For questions regarding this, or other tax related issues, please contact a member of Jackson Kelly’s Tax Practice Group.