Earlier this month, the Department of Labor (“DOL”) announced that its final rule amending the claims procedure requirements for plans providing disability benefits (“Disability Benefit Plans”) will become effective April 1, 2018. This announcement means that Disability Benefit Plans must be in compliance with the new disability claims procedure regulations by April 1, 2018. In light of this compliance deadline, this article provides a brief overview of the new disability claims procedure regulations, describes the types of plans impacted by the new requirements, and highlights key action steps employers sponsoring Disability Benefit Plans should take to ensure compliance by the April 1, 2018 deadline.
New Disability Claims Procedure Regulations
The new disability claims procedure regulations are intended to more closely align the ERISA claim and appeal requirements applicable to Disability Benefit Plans with the enhanced requirements imposed by the Affordable Care Act on nongrandfathered medical plans, thereby providing employees with new procedural protections when dealing with plan fiduciaries and insurance providers reviewing claims for disability benefits. The deadline for complying with the new requirements has remained uncertain, as evidenced by the following timeline:
- the new regulations were issued in December 2016 with a January 1, 2018 effective date;
- in late July 2017, the DOL announced that it was further reviewing the new disability claims procedure regulations for “law and policy” to determine if they should be amended, delayed, or withdrawn; and
- the DOL then announced a 90-day delay in the effective date of the regulations — through April 1, 2018 — which was intended to give interested stakeholders the opportunity to submit, and the DOL the opportunity to consider, data and information related to concerns by some insurance industry and employer groups, as well as certain members of Congress, that the regulations would drive up the cost of Disability Benefit Plans, cause an increase in litigation, and impair employees’ access to disability benefits.
On January 5, 2018, the DOL eliminated any remaining uncertainty regarding the compliance deadline by confirming that the new disability claims procedure regulations would not be further delayed, and would become effective on April 1, 2018. The DOL announcement noted that while the DOL received over 200 comments on the regulations, only a few comments responded substantively to the DOL’s request for quantitative data to support assertions that the regulations would drive up costs, increase litigation, and impair access to benefits.
Key changes reflected in the new disability claims procedure regulations include the following:
- benefit denial notices must contain a more complete discussion of any decision denying a claim for disability benefits;
- before a final decision is made on a disability benefit appeal, the claimant must be made aware of, and have a reasonable opportunity to respond to, any new or additional evidence or rationale used in making an adverse benefit determination on appeal;
- appeal denial notices must describe any contractual limitations period that applies to the claimant’s right to bring a lawsuit under ERISA, including the calendar date on which the contractual limitation period expires for the claim;
- if a plan fails to follow the requirements of the regulations, the claimant will be deemed to have exhausted available administrative remedies, giving the claimant the ability to bring a lawsuit on the basis that the plan failed to provide reasonable claims procedures;
- claim and appeal denial notices must be provided in a “culturally and linguistically appropriate manner,” which means that if the claimant to whom the notice is sent lives in a U.S. county in which 10% or more of the residents are literate only in the same non-English language, the plan must provide specific language services and accommodations in the applicable non-English language; and
- any hiring, compensation, termination, promotion, or similar decisions regarding a claims adjudicator or other claims-related employee (e.g., medical or vocational expert) cannot be based on the likelihood that the individual will support a denial of benefits.
Plans Impacted by the New Disability Claims Procedure Regulations
The new disability claims procedure regulations apply to Disability Benefit Plans, which are plans that (1) condition the availability of a benefit to the claimant on a showing of disability and (2) require the plan administrator or its delegate to make a determination regarding the claimant’s disability.
- Health and Welfare Plans. The most obvious impact of the new disability claims procedure regulations is on health and welfare plans providing disability benefits. This includes short-term disability plans that are governed by ERISA (i.e., not exempt from ERISA as a payroll practice) and insured and self-funded long-term disability plans. Any “wrap” plan documents that include such short-term disability and long-term disability plans also may be impacted by the new requirements.
- 401(k), Pension and Other Qualified Plans. If a finding of disability affects the vesting, timing, or calculation of a participant’s benefits under a 401(k), pension, or other qualified plan, and the determination of disability is made by the plan administrator or its delegate (e.g., a physician chosen by the plan administrator), the plan is subject to the new requirements. However, if the determination of disability is made by a party unrelated to the plan (e.g., by the Social Security Administration or the insurer for the employer’s long-term disability plan), the plan will not be subject to the new requirements, even if vesting, timing, and/or benefits under the plan are impacted by a finding of disability.
- Other Types of Plans. Any other ERISA-governed plan that conditions the availability of a benefit on a showing of disability and requires the plan administrator or its delegate to make a determination of disability also is subject to the new requirements.
Action Steps to Ensure Compliance Employers sponsoring Disability Benefit Plans should take the following actions to ensure compliance with the new requirements:
- Determine Impacted Plans. Inventory and review plans that provide disability benefits to determine which plans are subject to the new requirements.
- Coordinate With Insurers and Third-Party Administrators Regarding Administration and Documentation. For plans that are subject to the new requirements, proactively reach out to insurers and/or third-party administrators to discuss compliance. The insurers and third-party administrators will need to administer the disability claims procedures in accordance with the new requirements beginning April 1, 2018. In addition, insurance policies, certificates of coverage, and administrative services agreements should be reviewed to determine if any changes and/or amendments are needed in light of the new requirements.
- Amend Plan Documents. The governing plan documents for impacted plans should be amended to reflect the new requirements. Alternatively, employers sponsoring 401(k), pension, and other qualified plans may consider amending the governing plan documents to provide that the determination of disability will be made by a party unrelated to the plan (e.g., by the Social Security Administration or the insurer for the employer’s long-term disability plan), such that the new requirements do not apply. Any such change to a 401(k), pension, or other qualified plan’s definition of disability should be analyzed to ensure that the amendment does not give rise to an impermissible cutback under the Code. For all types of plans, best practice would suggest adopting the required amendments by the April 1, 2018 effective date.
- Communicate Changes to Participants. Participants should be notified of the changes included within the new disability claims procedure regulations. This could be done by issuing updated summary plan descriptions or summaries of material modifications for the impacted plans. Although plan sponsors may legally have until mid-2019 to communicate these changes to participants, best practice would be to communicate the changes contemporaneously with or as soon as practicable after the changes become effective. Timely communication of the changes may help to mitigate risk in the event of future litigation.
With the compliance date rapidly approaching, employers would be well advised to begin taking steps toward compliance now. Insurers and third-party administrators should be able to address many questions about the administrative implications of the new requirements and their impact on insurance policies, certificates of coverage, and administrative services agreements. However, employers also should consult with counsel regarding compliance and the impact of the new requirements on governing plan documents.