In recent talks and appearances, representatives of the U.S. Department of Labor have issued a warning about new areas of focus of DOL audits and enforcement actions.  While there are a number of different enforcement priorities, we discuss two of them—health plan claims and appeals and valuation of hard to value assets— here because these are areas in which the DOL has traditionally not spent significant time on audit.   In addition, these issues share the common characteristic of being able to be “cleaned up” in advance of an audit if plan fiduciaries take some common sense steps.

Health Plan Claims and Appeals

As most know, the DOL has been paying careful attention to ACA, HIPAA and mental health parity compliance in its audits of late.  In fact, just the other day the DOL issued updated compliance tools for these laws.

What is perhaps more interesting is that we are likely to see an expansion of scrutiny to other health plan matters, particularly claims and appeals.

DOL representatives have expressed concern that the complexity of health and welfare benefits adjudication creates an inherent risk of error (or, worse, fraud).  The DOL is also concerned that benefits are being systematically denied at the initial claim level, because, more often than not, participants do not appeal the initial claims determinations.  Further, the DOL is questioning whether plans are providing sufficient and understandable information regarding the reasons for denial of a claim, such that participants can adequately avail themselves of the appeals process.

Based on these DOL statements, we anticipate that DOL investigators may begin to spend more time reviewing whether claims and appeals are being handled on a timely basis in accordance with the plan’s claims and appeals procedures.  In the case of health plans that are subject to an annual audit, we would not be surprised if the DOL starts looking to confirm that the independent auditor is sampling the claims payment process with a focus on this issue.

The good news is that it appears that there are common sense action steps that can be taken before the DOL comes knocking on the door.  For example:

  • Review your plan documents/summary plan descriptions to confirm that they accurately describe the claims and appeals process.
  • Confirm that claims and appeals are being addressed in practice in a timely manner, whether you have an insured plan or use an “administrative services only” arrangement.
  • Consider conducting review of a sample claim and appeal denial letters to ensure that the letters are understandable and clearly explain the reasons for denials.

Hard to Value Assets

Completely switching gears, we note that another area in which the DOL appears to be focused relates to hard to value assets.  Recently, the DOL sent letters to a number of plans in the New York metropolitan area who reported on their Forms 5500 that they held assets whose value was neither “readily determinable on an established market” nor set “by an independent third party appraiser.”  These letters noted that the plans had reported such hard to value assets and “reminded” recipients of the existence of the DOL’s Voluntary Fiduciary Correction Program.

On first glance, one might conclude that the letter was much ado about nothing, because the DOL had not actually concluded that any particular recipient of this letter had violated any rules. However, we would not be quite so dismissive.  Rather, we view these letters as a reminder of the DOL’s position on the fiduciary obligations of a plan administrator with respect to the valuation of hard to value assets.

In that regard, some readers will recall that several years ago the Boston office of the DOL issued an enforcement letter to a plan concluding that it violated its fiduciary obligations by uncritically accepting the value reported by the general partner of a partnership in which the plan had invested, without any further inquiry (the reported value happened to be at cost).

While the DOL has not focused heavily on the issue of plan fiduciaries’ valuation of hard to value assets in recent years, it looks like the DOL’s approach may be about to change.  The combination of the New York “reminder” letter and some recent comments by DOL representatives regarding the DOL’s enforcement priorities suggests that the DOL will be taking a much closer look at whether and how plan administrators are confirming the valuation of hard to value assets.

That being the case, it may be advisable for plan administrators to get ahead of this issue by taking a fresh look at how plan assets are being valued.  Rather than blindly accepting the reported value of an asset, plan administrators should implement procedures—presumably something between blind acceptance and formal annual third party appraisals of every asset in every complex investment vehicle—that will satisfy the DOL.  For example, plan administrators should consider asking, among other questions:

  • Does the fiduciary (or someone such as an investment consultant advising the fiduciary) review valuation procedures of the manager/general partner of hard to value investments for reasonableness?
  • Does the procedure identify specific methodologies for each type of investment?
  • Are the valuation policies reviewed regularly?  Are exceptions reported?
  • Is there any inquiry into who serves as the auditor for the investment vehicle?  Is the entire process documented?

An additional resource for other ideas in evaluating valuation procedures is the American Institute of CPAs’ (AICPA) publication titled “Valuing and Reporting Plan Investments,” available here.