By Patrick J. Egan and Joseph P. Yonadi, Jr.
On December 16, 2016, the U.S. Department of Labor (“DOL”) published a final rule altering the claims procedure regulations for ERISA plans providing disability benefits (the “Final Rule”). The regulations, which finalize proposed regulations issued in November 2015, amend the existing DOL claims procedure regulations related to any ERISA disability benefit claim, whether the claim arises under a welfare plan (e.g., a long-term or short-term disability plan), or a qualified retirement plan.
According to a summary issued by the DOL, the Final Rule is “substantially the same” as the proposed regulations, however, as discussed below, there are some notable exceptions. The Final Rule will apply to claims for disability benefits filed on or after January 1, 2018. Thus, disability plans have almost a year to implement any changes to conform the operations of their claims review procedure with the new requirements imposed under the Final Rule.
In general, the Final Rule states that administrators of disability plans: (i) must provide more detail in adverse benefit decision letters (for both initial claim letters and appeal denial letters); (ii) adopt certain additional criteria to ensure independence and impartiality in the decision-making process; (iii) treat most rescissions as adverse benefit determinations; (iv) allow claimants to go directly to court if the claims procedures of the plan does not strictly comply with the requirements of the Final Rule; and (v) make disability claims subject to the same “culturally and linguistically appropriate” rules as group health plan claims.
The below summary sets forth both the key provisions that have been carried forward from the proposed regulations and highlights some of the changes included in the Final Rule:
(1) Avoiding Conflicts of Interest/Impartiality. Under the proposed rule, the DOL expanded the scope of the conflict of interest rules by providing new criteria for avoiding conflicts of interest and ensuring the impartiality of individuals involved with the claims review process. These requirements have been adopted in the Final Rule. Specifically, the new criteria require that:
One of the significant changes made to the conflict of interest provisions in the Final Rule is the expansion of the list of persons deemed to be involved in the decision-making process who must be insulated from a conflict of interest. Under the proposed rule, the individuals involved in the decision-making process included the claims adjudicator (such as the members of a review committee), and the medical experts who conducted any peer reviews. Under the Final Rule, the DOL has added vocational experts to the examples of persons deemed to be involved in the decision-making process.
In addition, the preamble to the Final Rule clarifies that the conflict of interest/impartiality requirements apply even if an ERISA plan does not directly hire or compensate the individuals involved in making claim determinations. Thus, the Final Rule:
For example, if a service provider to a disability plan is in charge of hiring, compensating, terminating, or promoting an individual involved in claims decision-making, the administrator of the disability plan must take steps (for example, through the terms of its service contract or ongoing monitoring) to ensure that the service provider's policies, practices, and decisions regarding hiring, compensating, terminating, or promoting covered individuals are not based on the likelihood that the individual will support the benefit denial decisions.
(2) Expanded Disclosure Requirements. The proposed rule required disability plans to provide the following three (3) additional pieces of information in any disability denial letter, including both the initial denial letter and appeal denial letter:
These above requirements remain generally unchanged in the Final Rule. Notably, however, the Final Rule adds two (2) key requirements:
(3) Right to Review and Respond to New Information Before Final Decision on Appeal. The proposed regulations also added additional requirements related to right to review and respond to any new or additional evidence or rationales developed by a plan during the pendency of a disability appeal. These provisions were basically unaltered by the Final Rule. Thus, under the Final Rule, a disability plan is required to:
The Final Rule did clarify certain aspects related to the extent of review rights granted to claimants. According to the DOL, claimants will be deemed to be deprived of their right to a full and fair review when they are prevented from responding to evidence and rationales at the administrative claims level. In the preamble to the Final Rule, the DOL dismissed concerns raised in several comments that this provision could result in an endless loop of submissions to the plan.
Further, the DOL noted that the administrator of disability plans may not satisfy the new review and response requirements:
Instead, the administrator of a disability plan must send the new or additional evidence or rationale automatically to the claimant as soon as it becomes available to the plan.
(4) Deemed Exhaustion of Claims Appeal Process. The proposed regulations also set forth certain revisions to the deemed exhaustion provisions as currently set forth under the existing DOL claims review regulations. The changes as set forth in the proposed regulations have basically been fully adopted by the Final Rule. Thus, after the 2018 effective date, the following changes will apply with respect to the disability claims review process:
(5) Coverage Rescissions. The proposed regulations amend the definition of an adverse benefit determination to include, for plans providing disability benefits, a rescission of disability benefit coverage that has a retroactive effect, whether or not, in connection with the rescission, there is an adverse effect on any particular benefit at that time. The change made in this context by the proposed regulations was adopted without change by the Final Rule.
(6) Linguistically Appropriate Denial Letters. The proposed regulations also included an obligation that, in certain situations, any adverse benefit decision must be provided in a “culturally and linguistically appropriate manner.” This obligation has been adopted unchanged by the Final Rule. Thus, under the Final Rule, if a claimant’s address is in a county where 10% or more of the population (as determined by the U.S. Census Bureau) are “literate only in the same non-English language,” notices of an adverse benefit determination must include a prominent one-sentence statement in the relevant non-English language about the availability of language services. Further, the Final Rule states that Plan will be required to “provide a customer assistance process (such as a telephone hotline) with oral language services in the non-English language and provide written notices in the non–English language upon request.”
The implementation of the Final Rule will require disability plan administrators to navigate several new obstacles, and any failure to successfully negotiate all of these additional responsibilities will likely lead to increased litigation, along with the loss of the deferential standard of review. Fortunately, the Final Rule applies to claims initially filed on or after January 1, 2018. Thus, plan administrators will have almost a year to modify their processes and procedures in order to bring their plans into compliance with the Final Rule.
W. Eric Baisden, Chair of Benesch’s Labor & Employment Practice Group, maintains a national labor and employment practice which includes representing employers in all areas of employment and labor relations, as well as related employment litigation, before federal and state administrative agencies and in trial and appellate courts in 45 states. Eric is ranked in the 2013-17 editions of The Best Lawyers in America, the 2015-17 editions of Ohio Super Lawyers, as well as in the 2014-16 editions of Chambers USA: America’s Leading Lawyers for Business. In the latter, his clients enthuse: “Eric is one of the best attorneys I have ever worked with. He is a reliable business partner who is supportive yet appropriately challenging.” His other clients agree, noting that he “speaks with a thoughtful and clear viewpoint,” and “possesses excellent people skills.” In addition, Eric is AV® Preeminent™ Rated by Martindale Hubbell, its highest available rating for legal ability and professional ethics. Eric has significant first chair experience in protecting employers from unfair competition, litigating the enforceability of restrictive covenants and confidentiality agreements, including obtaining and opposing TROs and preliminary injunctions. Eric has handled numerous cases under the FLSA and state wage and hour laws, including collective and hybrid class actions. Eric also litigates claims of wrongful discharge and discrimination, including ADA, age, race, pregnancy, gender and sexual harassment and intentional torts. He litigates cases under ERISA, including preemption, benefit denials, retaliation, and multiemployer pension fund issues, and claims to enforce or construe executive compensation and change of control agreements in connection with corporate mergers and acquisitions. His experience also includes legal proceedings regulating picketing and other organizational conduct of nonemployee union organizers and pickets and strike contingency planning, including TRO and preliminary injunction hearings regulating strike activities and striker misconduct.
Joe Yonadi is a partner in the Executive Compensation and Benefits Practice Group with a primary focus on matters involving qualified plans (both defined benefit and defined contribution), health and welfare plans, and non-qualified retirement plans. He assists clients in all aspects of their employee benefit programs, including plan design and drafting, operations, Internal Revenue Service (IRS) rulings and corrections, Department of Labor (DOL) audits and inquiries, participant communications, and mergers and acquisitions. Joe also has extensive experience addressing Code section 409A issues in the design and operation of non-qualified plans and executive compensation arrangements, as well as, assisting clients with compliance and design issues under HIPAA and The Patient Protection and Affordable Care Act. Joe is co-founder and key contributor to Benesch's Benefits Blog as well. Prior to joining Benesch, Joe served as Senior Employment Counsel and Human Resources Legal Team Leader at a Fortune 300 global retail and manufacturing company headquartered in Cleveland, Ohio. Joe provided day-to-day legal counseling on the Company’s global retirement, health and welfare, and executive compensation plans, as well as, serving as ERISA counsel to the company’s plan administration and fiduciary investment committees.