Plan sponsors who provide benefits based upon determinations of disability should be prepared for the new procedural rules that started governing disability claims April 1. The U.S. Department of Labor issued these procedures in December 2016 but delayed implementation until now. The final procedures incorporate similar procedural protections and safeguards that were implemented pursuant to the Affordable Care Act requirements applicable to group health plan claims, although these new procedures are tailored to the unique features of disability claims. The DOL intends for the new procedures to provide increased transparency and accountability in the disability claims process, which in turn will allow for a full and fair review of disability claims.
Although more than half of the benefits claims litigated involve long-term disability claims, disability claims can arise in other areas, including pension plans and welfare plans. Under the procedural rules, a "disability benefit" is any benefit that is conditional upon a showing of disability, regardless of the type of plan involved. This means that the claims procedures could apply to a pension plan, a nonqualified deferred compensation plan, or other plan that conditions a benefit on a determination of disability. However, the rules do not apply where the disability determination under the plan is made by a third party, such as the Social Security Administration or the employer's long-term disability plan administrator. The following is a summary of the five major components of the new rule:
1. Independence and Impartiality Avoiding Conflicts of Interest. Decision-makers in a disability benefit determination must be independent and impartial. This means that the decision-maker must not be "rewarded" or "penalized" based on his or her likelihood of supporting a denial of benefits. Among other things, rewards or penalties could include hiring, compensation, termination, or promotion, as well as bonuses based on the number of claim denials. Nor can a plan contract with a medical expert or vocational expert based upon that expert's reputation for a particular outcome in a contested case. Instead, experts must be retained based upon their professional qualifications.
2. Improved Disclosure Requirements. The new claims procedures are designed to improve the disclosure requirements for disability claims in a number of areas.
Complete Discussion. Claim denial letters are expressly required to contain a complete discussion of why the plan denied the claim and the standards applied in reaching the decision. This discussion must include the basis for disagreeing with any disability benefit determination made by the Social Security Administration, or any views of health care professionals (including vocational professionals) treating or evaluating the claimant to the extent the determination or views were presented by the claimant to the plan. This means the denial letter must include more than a statement that the plan or reviewing physician disagrees with the treating physician or health care professional. Moreover, where an SSA determination is based on definitions, presumptions or evidence that differ from those applicable to the plan, the denial letter must discuss those differences. The denial letter must also continue to identify any medical or vocational experts whose advice was obtained on behalf of the plan regarding the denial. If the plan did not adopt the views of an expert who supported the claim, the denial letter must explain why the plan did not adopt the expert's views.
Disclose Internal Rules. Claim denial letters must contain the internal rules, guidelines, protocols, standards, or other criteria of the plan that were relied on in denying the claim. The DOL believes this new requirement adds only an incremental burden to plan sponsors, because they were previously required to provide such information to participants upon request. If no rules or guidance were relied upon in denying the claim, then the denial letter must state that such criteria do not exist.
Right to Relevant Documents. Denial letters at the initial claims stage must contain a statement that the claimant is entitled to receive, upon request, relevant documents. This requirement is consistent with the prior rule requiring such a statement in notices of claim denials at the appeal stage.
Limitations Period. Denial letters at the appeal stage must include a prominent statement of any applicable contractual limitations period, as well as the actual calendar date on which the limitations period expires. An updated notice must be provided if the expiration date changes due to tolling or some other event.
"Culturally and Linguistically Appropriate" Denial Notices. Denial letters must include prominent statements in a non-English language about the availability of language services if the claimant lives in a county where 10 percent or more of the population is literate in only that non-English language. In addition, verbal customer service, such as a telephone hotline, must be in the non-English language, and the claimant may request that his or her notices be in the non-English language. Although the DOL noted that the new rules do not specifically address the language of communications other than those involving adverse benefit determinations, the agency declined to affirmatively state that they do not apply to such communications, citing the general fiduciary obligations of a plan sponsor as well as other provisions in the Employee Retirement Income Security Act that may require plans to provide participants and beneficiaries with access to language services.
3. New or Additional Evidence or Rationales. In an effort to provide a full and fair review of a claim on appeal, the new claims procedures provide claimants the ability to review and respond to any new evidence or rationales developed by the plan during the pendency of an appeal. Under prior practice, claimants had the right to review such information only after a claim had already been denied on appeal, and only upon request. Under the new rule, plans are required to provide claimants with new or additional evidence or rationales considered, relied upon, or generated by the plan, insurer, or other person making the benefit determination during the pendency of the appeal. Although no time period is provided, the regulations require provision of the new evidence or rationale as soon as possible (that is, as soon as it becomes available to the plan) and sufficiently in advance of the due date of the appeal determination to provide the claimant with a reasonable opportunity to respond.
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4. "Deemed Exhaustion" of Claims and Appeals Process. Generally, a claimant is required to exhaust his or her administrative remedies before initiating litigation over a benefit denial. Under the new rule, the claimant will be "deemed" (considered) to have exhausted his or her remedies if the plan fails to follow its own claims procedures in issuing a denial. Moreover, if the plan does not follow its own procedures, fiduciary discretion may not apply, which means that the denial will be reviewed de novo in the event of litigation. The new rule provides a limited exception for procedural deviations that are de minimis. To fall within the de minimis exception, the plan's failure to follow its claims procedures must not have prejudiced the claimant, must have been attributable to good cause or matters beyond the plan's control, must have occurred in the context of an ongoing good-faith exchange of information, and must not be part of a pattern and practice of noncompliance. If a court determines that the de minimis exception applies (and, as a result, finds that the claimant failed to exhaust his or her administrative remedies), the deemed exhaustion rule requires the plan to treat the claim as re-filed on appeal.
5. Rescissions of Coverage Adverse Benefit Determinations. The definition of "adverse benefit determination" now includes retroactive rescission of disability benefit coverage, including a retroactive rescission due to an alleged misrepresentation or error in the application for coverage. Retroactive rescissions due to a failure to timely pay required premiums are not included in the definition.
What to do now? All employee benefit plans should be reviewed to determine whether a disability determination must be made, and if so, who makes it. New claims filed on or after April 1 must be handled pursuant to the new claims procedure rules. Plan sponsors who outsource their benefit determinations should check with their third party providers to ensure they have mechanisms in place to follow the new procedures; contracts may need to be amended to reflect the new procedures. In addition, any existing written policies and procedures should be amended to demonstrate compliance with the new procedures. Where claims procedures are contained in a plan document, those plan documents should be amended by the end of the year to incorporate the new procedures.