This article addresses compliance considerations and best practices for the administration of benefit claim procedures, including internal review of denied benefit claims, under employee benefit plans governed by the Employee Retirement Income Security Act. As discussed herein, the appropriate plan fiduciaries’ failure to implement and follow compliant claims procedures can have costly consequences for plan sponsors.
ERISA Claims Administration Basics
ERISA requires employee benefit plans to provide participants and beneficiaries adequate written notice of a benefits claim denial. That notice must set forth the specific reasons for the denial and afford the participant or beneficiary a reasonable opportunity for a full and fair review of a denied claim. The U.S. Department of Labor has promulgated regulations that contain minimum requirements for employee benefit plan procedures pertaining to claims for benefits.
It is mandatory to establish and maintain written claim procedures for an ERISA employee benefit plan. These must be set forth in the plan’s summary plan description or in a separate document that accompanies the SPD. In the latter case, the SPD must disclose that the claims procedures are provided separately and are available free of charge.
The claims administration rules have both procedural and substantive components. All applicable ERISA plans must have reasonable procedures in place that allow participants and beneficiaries the ability to apply for and, where entitled, receive the plan’s promised benefits.
The principal compliance concerns include:
- The availability and communication to participants and beneficiaries of fair and fulsome claim appeal procedures;
- Communication of time frames for making initial claim determinations and claim appeal decisions;
- Following regulatory requirements for contents of the notices required for denied initial claims and adverse claim appeal decisions; and
- Permitting the free flow of information relevant to the benefit determination.
Plans providing benefits upon a disability and nongrandfathered Affordable Care Act-covered group health plans are subject to enhanced procedural safeguards (including the right to an external appeal under the ACA rules).
Responsibility for Claims Administration
Plan administrators (whether named, designated or otherwise) act as ERISA fiduciaries when conducting claim administration and review, and are subject to ERISA’s fiduciary requirements in fulfilling their duties regarding claims review. Although third-party service providers typically carry out these activities, it is important for the plan sponsor, administrative committee or other responsible plan fiduciary to understand the requirements to fulfill its fiduciary role by the prudent selection and monitoring of the service providers.
Exhaustion of Internal Claims Procedures
In accordance with ERISA’s claims administration regulations, claimants typically must exhaust the plan’s internal claims procedures as a prerequisite to pursuing a civil action under ERISA (or requesting an external review under the ACA). However, the exhaustion requirement will not apply if the plan does not adhere to the minimum regulatory standards.
If a claimant can show that a plan’s internal procedures do not comply with these rules (or the plan failed to follow compliant procedures), any requirement to exhaust the internal administrative process is deemed satisfied. Moreover, as discussed further below, courts will not give deference to the plan fiduciary’s decision to deny benefits or any conclusions drawn by the fiduciary in a flawed claims administration process.
The exhaustion rule should be clearly and explicitly set forth in the plan and claims procedures provided to participants or it may be held not to apply.
Under informal DOL guidance, there is a so-called minor errors exception to the exhaustion rule that applies when a plan’s failure to apply a compliant process is inadvertent and does not prejudice the claimant, provided the plan allows for an opportunity to effectively remedy the failure. For plans subject to the ACA and disability benefit claim procedures, there is a somewhat narrower exception for de minimis noncompliance.
Courts have adopted a substantial compliance doctrine consistent with this approach to de minimis errors, although the doctrine has been called into question following the DOL’s overhaul of the claim procedure regulations in 2002. For a recent discussion, see Fessenden v. Reliance Standard Life Insurance Co., (finding that adverse benefit determination delivered eight days late, and after claimantinitiated lawsuit, should have resulted in de novo review and holding that substantial compliance in the Seventh Circuit does not extend to blown deadlines).
Judicial exceptions from the exhaustion rule have included cases that are permitted to proceed because going through the internal process would be futile, would otherwise deny meaningful access to a full and fair review, or would cause a harmful delay in claim adjudication.
Importance of Claims Administration Compliance in Defending ERISA Suits
Consequences of Claims Administration Noncompliance
Perhaps more important than the exhaustion implication, if a plan administrator fails to adhere to any of ERISA’s minimum standards for benefit determination and appeal procedures, the plan administrator will lose the deference that would typically have been afforded to its benefit determination and plan interpretation as the court will apply a de novo review standard for the claim.
In 2014, the U.S. District Court for the District of Connecticut ruled in Halo v. Yale Health Plan that civil penalties can also be awarded for a plan’s failure to comply with the claim procedures regulations. However, this was inconsistent with several courts of appeals decisions, and the U.S. Court of Appeals for the Second Circuit overturned the ruling, because, among other reasons, ERISA’s claims procedure rules offer remedial relief for noncompliance, but do not contain a civil penalties provision, unlike other ERISA provisions.
While the appeals court’s ruling in Halo gave reason for plan administrators to breathe a sigh of relief by rejecting civil penalties for claim processing failures, that same decision should also gave them reason for caution.
Ordinarily, a federal court reviews a plan’s benefit denial under the deferential arbitrary and capricious standard. But in Halo, the court held that if a plan denies a claim for benefits and fails to comply with the claims procedure regulations, courts will review that claim de novo instead, "unless the plan has otherwise established procedures in full conformity with the regulation and can show that its failure to comply with the claims-procedure regulation in the processing of a particular claim was inadvertent and harmless."
Further, Halo contained another potential pitfall for administrators who do not closely follow claims procedure regulations:
[We] hold that a plan’s failure to comply with the claims-procedure regulation may, in the district court’s discretion, constitute good cause warranting the introduction of additional evidence outside the administrative record.
Other courts have since followed this model, both in applying de novo review when a denial of benefits determination violated the claims procedure regulation’s requirements and permitting district courts to consider relevant materials not in the administrative record if noncompliance with the benefit denial review process adversely affected development of the record.
These cases underscore the importance of consistently following claims procedure rules. While failing to follow these regulations closely may not result in an immediate monetary penalty, losing the deferential review standard can prolong the litigation, leading to significantly higher costs. To avoid costly complications, plan administrators should confer with in-house or outside counsel to make sure that their claims procedures are in line with the requirements.
Inconsistency in Claims Administration Can Hurt You
The best way to protect defenses in future litigation is to make a clear, final claim determination. Even when administrators do not fall into the traps discussed above and do obtain the deferential arbitrary and capricious standard of review, inconsistencies in their claims review processes can still haunt them.
In Patterson v. Aetna Life Insurance Co., for example, the plaintiff claimed long-term disability benefits resulting from a back injury. The plan administrator initially approved the benefits and continued paying them for seven years. But after additional surveillance and vocational analysis, the administrator terminated the plaintiff’s benefits.
The U.S. District Court for the District of New Jersey held that the decision to terminate benefits was arbitrary and capricious, largely because the administrator had not conducted an independent medical examination and the administrator evaluated the same evidence at different times and reached different conclusions. The court was particularly troubled by the administrator’s argument that the original award of benefits was erroneous: "A retroactive finding that a plaintiff was never entitled to LTD benefits, without new medical information, is itself evidence of arbitrariness and capriciousness."
The DOL regulations require that a plan’s "claims procedures contain administrative processes and safeguards designed to ensure and to verify that benefit claim determinations are made in accordance with governing plan documents and … have been applied consistently with respect to similarly situated claimants." In the preamble to the final claim regulations, the DOL noted that courts have long recognized that such consistency is required even under the most deferential judicial standard of review.
Failing to Respond to Plan Document Requests: Civil Penalties and Other Adverse Consequences
One of the more ministerial acts that an ERISA plan administrator must perform is responding to a participant’s or beneficiary’s request for plan documents. Timeliness matters. Failing to furnish, within 30 days after a written request, an ERISA plan’s latest summary plan description, annual report, terminal report, trust agreement, or the documents under which the plan is established or administered can result in civil penalties.
Under ERISA Section 502(c)(1), the DOL (or a court) has discretion to award a civil penalty of up to $110 per day for each alleged violation. While the DOL may assess a civil penalty for failing to provide plan documents, participants or beneficiaries may also file a complaint in federal court seeking the civil penalty against the plan administrator.
These complaints may be filed individually, but often are pleaded in conjunction with another alleged ERISA violation, such as a wrongful denial of benefits claim. A court has great discretion when deciding whether to implement a civil penalty, and typically considers whether the participant or beneficiary suffered any prejudice by the nonreceipt of the plan document and whether any mitigating factors exist to excuse the plan administrator’s failure or delay in responding.
Timely response to document requests sometimes falls through the cracks, but plan administrators should be especially mindful of these obligations in the context of denied benefit claims, since there may be increased risk of civil penalty liability. In one extraordinary case, Cromer-Tyler v. Teitel, the plaintiff, a former employee in a surgical practice, did not receive any plan documents until after she filed a suit for wrongfully denied benefits. The documents were provided four and half years after her first request.
Here, the plaintiff won her claim after a bench trial, and the court awarded the full penalty of $110 per day for each of the 1,636 days the administrator failed to provide the documents: $179,960. While Cromer-Tyler is an extreme example, even a less egregious violation can have consequences. Moreover, the U.S. Court of Appeals for the Fourth Circuit recently reminded litigants while findings of prejudice and bad faith are relevant to a penalty determination, they are not required.
To avoid missing plan document requests, it can be helpful to direct all incoming participant communications to the same person or group within the organization for identification and processing of document requests. Consider procedures for date-stamping requests as received and tracking them through processing to ensure timely responses.
Managing Conflicts of Interest
It has long been recognized that a particular danger exists for biased benefit claim determinations in certain benefit plan arrangements where a single entity is ultimately responsible for both funding the plan benefits and processing claims (such as for many employer self-funded plans). The U.S. Supreme Court recognized as much in Metropolitan Life Insurance Co. v. Glenn, holding that a reviewing court should consider such inherent conflicts of interest as a factor in determining whether the plan administrator has abused its discretion in denying benefits.
Glenn does not, however, subject such cases to de novo review. Rather, courts are required to weigh the significance of the conflict, which will depend upon the circumstances of the particular case, to determine whether the plan administrator abused its discretion (therefore making the deferential abuse of discretion standard inapplicable).
A significant side effect of Glenn is to subject the plan sponsor or other fiduciary defendants to additional discovery to determine the existence and extent of any conflict of interest. For example, a history of claims administration decisions that give the appearance of a predominant bias on behalf of the plan or administrator could be an important factor for a court to assess the significance of the conflict on the claim at issue.
Plans should implement internal controls and procedures that are reasonably designed to ensure accuracy and mitigate inherent conflicts of interest, such as:
- Insulating claims processors from influence by the organization’s financial departments;
- Excluding top-level officers from fiduciary oversight roles;
- Ensuring claims processor compensation (or other benefits or terms of employment) and thirdparty claims administrator fees are not in any way dependent upon the outcome of claims decisions;
- Conducting periodic audits of claims decisions to ensure accurate decision-making and identify potential patterns of bias; and
- Establishing criteria and standards that are as objective as possible for benefit entitlements.
Being able to demonstrate these measures can help counteract the weight a court may otherwise place on an apparent conflict of interest and preserve a greater degree of judicial deference.
Best Practices for Benefit Claims Administration
For a plan administrator, small decisions can have big impacts on future litigation. Some suggestions for plan administrators to protect against, or at least limit, possible civil penalty exposure and the loss of litigation defenses include those listed below
1. Read and Understand All Relevant Documents
Study all relevant plan documents (e.g., the plan and any amendments or appendices, the summary plan description, governing insurance policies or contracts, any collective bargaining provisions affecting plan benefits or administration, etc.) along with the plan’s internal procedures and protocols. Identify and resolve any ambiguities, inconsistencies or omissions.
2. Track Claims for Timely Processing
Create a docketing system where benefit claims and document requests are logged, tagged with relevant deadlines and continuously tracked.
3. Maintain Communication With Counsel
Copy in-house and outside counsel on communications as appropriate and seek legal advice in the event of any uncertainty as to compliance responsibilities, steps or timelines. Extra work — and early inclusion of counsel — on the front end can help avoid a civil penalty, losing a litigation defense or prevailing party status, or otherwise hampering the defense of an ERISA claim down the road.
4. Maintain Communication With Other Plan Fiduciaries
Regularly report on claim processing activities. If other fiduciaries are responsible for other aspects of plan administration, work together to ensure that claimants are receiving timely responses to document and information requests
5. Create a Complete Record — Procedural and Substantive
Build an administrative record of a claim’s history while executing a plan’s claim and appeals procedure. This is of utmost importance if the matter is litigated. Document everything, not just decisions, but also any and all tasks commenced and complete involving the processing of each claim.
- Ensure you can demonstrate procedural compliance with ERISA and the internal rules in every case.
- Log all documents, records and information relevant to the claim so they can be easily identified for purposes of meeting disclosure obligations. The DOL expects claimants to be provided with anything the plan actually used to deny a benefit claim (e.g., specific plan rules or guidelines governing the application of specific protocols, criteria, rate tables or fee schedules applied; physicians’ evaluations or other reports reviewed when considering the claim; any checklists relied upon to affirm appropriate claim processing; etc.) as well as documents, records, or other information submitted, considered, or generated for purposes of making the benefit determination, whether or not it was actually used
6. Establish and Follow Clear Procedures for Uses of Authorized Representatives
You must allow a claimant’s authorized representative to act on behalf of the claimant for the benefit claim and review process. However, the plan can and should have clear, easy-to-follow, wellcommunicated procedures for claimants to designate someone as their authorized representative, such as through a representative designation form completed by the claimant.
Be sure that all claims fiduciaries understand the extent to which an authorized representative will be acting on behalf of the claimant (e.g., will the representative be the sole recipient of notices or will the claimant receive a copy). Also remember that a health care professional treating the claimant or otherwise knowledgeable about their condition must be permitted to act on the claimant’s behalf for a group health plan’s urgent care claim, even without any designation. You can require a Health Insurance Portability and Accountability Act authorization for this purpose so the plan can provide protected health information to the health care professional, if required.
7. Clearly Disclose Any Plan-Based Time Limits for Commencing a Lawsuit
Many plans set a time limit within which claims must be filed in court after exhaustion of the internal process. ERISA doesn’t provide an explicit statute of limitations on benefit claim lawsuits (relying instead on the most applicable underlying state law limitation), but the Supreme Court has upheld plan-based contractual limitations that are reasonable in scope.
Periods of less than one year following the final internal appeal decision have been held reasonable by various courts, but one to three years is typical. In any case, you must ensure all claimants are aware of the limitation.
In addition to stating the rule in the plan document and summary plan description, include any contractual limitations period in any claim denial notice that discusses the civil litigation remedy. Moreover, for a disability benefit claim, you must not only state the limitation rule but also identify the calendar date on which the right to sue over the instant claim will expire in an adverse determination on appeal, though this is a best practice for any type of claim.
8. Follow Applicable Rules for Culturally and Linguistically Appropriate Notices
Under the ACA and disability benefit claims procedure rules, if the claimant’s address is in a county where 10% or more of the county’s population are non-English literate, any claim denial notices must include a statement, in the applicable non-English language, clearly indicating how to access the plan’s language services (which must include arrangements to provide information (including the contents of the notice) and other assistance in the applicable non-English language).
This article was first published in Law360.