Disability Claims Procedures: What You Need To Do Now
Employee Benefits Law Alert 02/15/18 Michael C. Wieber, John L. Barlament, Abigail Darwin
(P.S. Don't skip reading this if you only have retirement plans; these rules may still apply to you!)
In January 2018, the Department of Labor (DOL) issued updated disability claims procedures that have shorter deadlines and that require more active involvement by plan sponsors. These rules, which become effective April 1, 2018, reflect the DOL's concern that almost two-thirds of ERISA litigation arises out of long-term disability plans. Even so, the rules apply to any ERISA-covered plan that requires the plan administrator to make a determination of disability.
Depending on the terms of your plans, these rules may require you to update your claims procedures and to communicate those updates to participants in your plans. If you don't update your claims procedures or if you fail to follow those revised procedures, a participant may proceed directly to court when you reject their claim for a disability benefit. On the other hand, if you do follow your plan's claims procedures, the plan administrator's decision is generally considered to be final, and a court would not be likely to second-guess your decision.
An Important Exception
While many plans and summary plan descriptions (SPDs) will require revisions to take into account the new rules, if a particular plan relies on a disability determination that is made by an outside third party, the new claims procedure rules will not apply.
For example, if the plan relies on the Social Security Administration's disability determination for purposes of the plan's determination, you are not obligated to implement or follow the new procedures.
Similarly, if your pension plan's determination of disability relies on a determination made under your long-term disability plan, your pension plan will not be subject to the procedures. (Be careful, though, because your long-term disability plan might still be subject to the new rules unless it also looks to a third party for claims decisions.)
Remember That These Rules Apply to Many Types of Plans
In addition to traditional disability and health plans, these rules apply to 401(k) plans, profit sharing plans, employee stock ownership plans (ESOPs), cash balance plans, and any other pension plan that may require you to make a determination of disability. The rules even apply to deferred compensation plans that offer differing benefits if a participant becomes disabled. These retirement-type plans frequently offer early benefit commencement and full vesting when a participant experiences a disability, so disability determinations can have significant consequences.
Many of the changes required by the new regulation are not major. Some perhaps will not require any modifications to current procedures. But plan sponsors will need to examine them and verify what, exactly, they must do. Changes include:
(1) New Rationale Requires Communication with Claimant. Perhaps the most significant change requires that the plan communicate to the claimant any new evidence or rationale the plan generates. The plan then must provide that new evidence or rationale to the claimant before the final date the plan must make its decision. The claimant has an opportunity to respond to the new evidence or rationale. The plan must consider the claimant's response, if any. This new change in essence creates an entirely new time period for a required communication. It may require plan administrators (or their vendors) to create a new process to meet this rule.
(2) Avoid Conflicts of Interest. Plan sponsors must ensure that their procedure for deciding claims does not involve any conflicts of interest. For example, suppose an appeal is heard by a benefits committee. Suppose a member of the committee has his or her compensation based on whether claims and expenses decrease. That most likely would be improper.
(3) More Details About Denial. The regulations require that more detail be provided about denied claims. If a third party's decision on a claimant's disability status is not followed, the plan administrator must explain why it was not followed. The specific section of the plan that is the basis for the denial must be noted.
Actions Required Now
What does this mean for you? You will need to:
- Amend your plan (if your plan includes a claims procedure and requires you to make a disability determination)
- Update your claims procedures as reflected in each applicable plan's SPD
- Communicate these updates to participants
- Update your internal procedures for processing disability claims, and amend your claims denial forms
- Discuss these changes with vendors to verify that they will follow the new rules. Consider whether the vendor's contract requires them to follow this rule and assume liability for failing to follow the rule.
To ensure that employee benefit plans that provide disability benefits are properly amended by April 1, 2018, plan administrators should act quickly.