Now, faced with an aging baby-boomer generation and increased costs related to disability litigation, the U.S. Department of Labor’s Employee Benefit Security Administration (DOL) has proposed new rules that would revise and strengthen the current rules for claims adjudication of disability claims under welfare and retirement plans. The Employee Retirement Income Security Act of 1974 (ERISA) Section 503 requires every employee benefit plan to provide adequate notice in writing to any participant or beneficiary whose benefit claim has been denied in order to provide a full and fair review of the claim. In 2000, the DOL instituted new claims regulations for all benefit plans, which greatly increased the procedural rules and responsibilities on plan administrators related to claims adjudication. In 2010, through the Affordable Care Act, the U.S. Department of Health and Human Services, the DOL and the U.S. Department of the Treasury, additional claims rules and duties were added to ERISA claims adjudications under health care plans. These new proposed disability claim rules attempt to preserve all defenses available to benefit plans prior to ERISA benefit litigation. If the rules become final, they would make a plan administrator’s duties and responsibilities more complicated.

The DOL’s proposed disability claim rule amendments seek to reach several goals: (1) ensure that claims and appeals are adjudicated independently and impartially; (2) flush out a full discussion of all reasons related to a claim denial; (3) require that claimants have full access to their entire claim file; (4) provide claimants with an opportunity to rebut new evidence and rationales supporting claim denials; (5) ensure that denials are not “final” until all evidence is produced and considered; (6) provide that procedural deficiencies in claims review processes will result in deemed denials and remedy exhaustion; and (7) require that claims decisions are written in a culturally and linguistically appropriate manner. These proposed rules would apply to any disability-based ERISA benefit claim, whether the claim arises under a welfare plan (e.g., a long-term or short-term disability plan) or a retirement plan (e.g., a disability retirement benefit under a pension plan).

Independence and Impartiality – Avoiding Conflicts of Interest

The proposed rules build on existing standards of independence and impartiality for persons making claims determinations. The rules would require that plans not make hiring, compensation, promotion or termination decisions based upon a claim adjudicator candidate’s propensity for denying disability benefits. Plans would also need to review a medical expert’s professional qualifications rather than his/her reputation for outcomes in contested cases. On an operational level, plans would not be able to use the rate of a claim adjudicator’s claims denials as a basis for providing a bonus to that claims adjudicator.

Improvements to Basic Disclosure Requirements

As a means of ensuring that a claimant fully understands the reasoning behind his/her disability benefit denial, the proposed rules would add four changes to current disclosure rules:

1. Any adverse benefit determination, at the initial claim or claim appeal stage, must contain a discussion of the decision.

2. To the extent that any benefit determination disagrees with a claimant’s disability determination by the Social Security Administration, a treating physician or a third-party disability payor, the determination must contain the plan’s specific basis for the disagreement.

3. Any adverse benefit determination must contain the criteria the plan used in denying the claim. These criteria could include a statement of the plan’s internal rules, guidelines, standards or a statement that such rules or standards do not exist.

4. At the claim stage, a notice of adverse benefit determination must contain a statement that the claimant is entitled, upon request, to receive relevant documents.

The DOL included these changes to give the claimant a meaningful opportunity to evaluate the merits of pursuing a challenge to the benefit denial; either internally through a claim appeal with the plan’s administrator, or externally through litigation under ERISA Section 502(a).

Rights to Review and Respond to New Information before the Final Claim Determination

The DOL believes that claimants are deprived of a full and fair review when they are unable to respond to evidence and rationales at the administrative claim level. Under the current Section 503 claims regulations, some courts have held that a claimant may only review any new evidence and rationales after the claim has been denied on appeal.

The proposed rules explicitly provide that a claimant has a right to review and respond whenever the plan develops new evidence or rationales during the pendency of a claim appeal. Prior to any decision on appeal, the plan administrator will need to provide the claimant, free of charge, with any new or additional evidence considered, relied upon, or generated in connection with the claim. The plan administrator will also need to provide the claimant a reasonable opportunity to respond to the new evidence. This opportunity to respond may be in the form of written testimony or evidence. Under the proposed rules, the time required for a continued dialogue with the claimant if and when the plan develops new evidence—for example, when the plan generates a new medical report—could require the DOL to adopt special tolling rules.

The DOL’s current position is that the time periods for claim and appeal determinations will not change as a result of the added exchange of new evidence or rationales for denial. The DOL has requested comments on whether, and to what extent, special tolling provisions should be added to the existing timing rules to ensure that disability benefit claimants and plans have ample time to engage in the back-and-forth that the proposed rules contemplate. One idea is to adopt similar tolling rules to those currently in place for group health plans. Under the current regulations for group health plans, the period for providing a notice of final internal adverse benefits determination is tolled until the claimant has a reasonable opportunity to submit a response.

Deemed Exhaustion of Claims and Appeals Processes

The proposed rules also state that a deemed exhaustion of claim remedies will occur whenever a plan fails to adhere to all the requirements of Section 503 and its supporting regulations. In the wake of a deemed exhaustion due to a plan’s failure to follow Section 503, the reviewing tribunal will be required to give no special deference to the plan’s previous decision and instead  review the claim dispute de novo. This is because the proposed rules would consider the claim or appeal denied without the exercise of discretion by an appropriate fiduciary.

The proposal does however provide plans with a five-point minor errors exception. Under this exception, a plan must provide a claimant, upon that claimant’s request, an explanation of why the Section 503 violation was a minor error. The exception dictates that a claimant is not entitled to seek immediate court action when the plan’s violation of Section 503 is

1. De Minimis

2. Non-prejudicial

3. Attributable to good cause or matters beyond the plan’s control

4. In the context of an ongoing good-faith exchange of information

5. Not reflective of a pattern or practice of non-compliance

The proposed rules also give the claimant procedural protection when the reviewing tribunal rejects her attempt to pursue remedies in court based on deemed exhaustion. If a court finds that the minor errors exception is justified, then, when the plan receives the court’s rejection of the claimant’s request, the proposed rules consider the claim re-filed on appeal. The plan must then provide the claimant with notice of the re-filing within a reasonable time, and allow the claimant to pursue the claim, through evidence and testimony, in accordance with the plan’s provisions governing appeals.

Coverage Rescissions Considered Adverse Benefit Determinations

The proposed rules would also amend the definition of “adverse benefit determination” to include a retroactive rescission of disability benefits, whether or not there is an adverse effect on any particular benefit at the time. The proposal would define the term “rescission” to mean “a cancellation or discontinuance of coverage that has a retroactive effect, except to the extent it is attributable to [the claimant’s] failure to timely pay required premiums or contributions towards the cost of coverage.”

This amendment is meant to cover situations where a rescission is made as part of an internal audit, or is otherwise made in absence of a claim. The proposal contains, as an example, the situation where a plan rescinds disability coverage at a time when the participant or beneficiary was not receiving disability benefits. Under the current regulations, rescissions that have a retroactive effect and are made in the absence of claims can occur without any participant knowledge, and without any procedural protection for participants.

Culturally and Linguistically Appropriate Notices

For claimants living in a county where 10 percent or more of the population are literate only in the same non-English language, the proposed rules require adverse benefit determinations to include a prominent one-sentence statement in an appropriate non-English language about the availability of language services. A plan administrator issuing an adverse benefit determination to one of these participants must also provide written notices in that non-English language upon request, and provide a customer assistance process—for example, a telephone hotline—with oral language services in the non-English language. The DOL defines oral language services as the following:

1. Answering questions in any applicable non-English language

2. Providing assistance with filing claims and appeals in any non-English language

Data from the American Community Survey (ACS) by the U.S. Census Bureau will determine literacy percentages and relevant languages for the purpose of the proposal. Currently, there are 255 counties that meet the 10 percent threshold. The overwhelming majority of the non-English language for these counties is Spanish: 78 counties are in Puerto Rico. Chinese, Tagalog, and Navajo are present in several counties as well.

Under the proposal, plans whose participants reside in Alaska, Arizona, California and New Mexico must become familiar with the list of affected counties that the DOL will annually post online.

Quarterly Meeting Rule to Only Apply to Multi-Employer Plans

The proposed rules also seek to clarify that the quarterly meeting rule, which provides extended time frames for deciding disability claims, will only apply to multiemployer plans. This is a change from the current DOL claims regulations that apply to all types of plans.

Notices for Contractual Limitations Periods

Currently, ERISA does not specify a statute of limitations period for filing a court action after an adverse benefits determination. In the past few years, the use of contractual limitation periods to reduce the time for claimants to challenge adverse benefit determinations in court have greatly increased. In 2013, the Supreme Court of the United States upheld the use of reasonable contractual limitations periods in the Heimeshoff v. Hartford Life & Accident Inc. Co. decision.

The proposed rules seek comments on whether the DOL should issue a final regulation that requires plans to include a clear and prominent statement of any applicable contractual limitations period and its expiration date as part of the final notice of adverse benefit determination on appeal. The proposed rules also seek comments on whether plans should be required to provide claimants with updated notices of the expiration date if tolling or some other event causes the date to change.

Summary

These proposed rules, if issued in final form, will greatly increase the duties of plan administrators and fiduciaries in reviewing and rendering decisions on disability-related claims.  The proposed rules significantly add to the number of hoops that a plan administrator must reasonably and timely jump through to decide benefit claims, and increases the potential that any failure to clear these new hoops may result in losses of defenses and, likely, increased liability through ERISA litigation of disability claims. Plan fiduciaries should review these proposed rules and contact their counsel to ensure that all of the new rules are properly written into their benefit plans; their claim appeal procedures reflect these requirements; and their claim determinations; and are handled accordingly so that existing defenses are not lost due to claims slipping through the procedural cracks.

Emily M. Rickard also contributed to this article.