Failure to comply with claim-review requirements can put employers at risk
The U.S. Department of Labor's (DOL's) new procedures for processing disability claims take effect on April 1. Any employer-sponsored plan that deals with disability claims should be amended as needed. If plan documents have not yet been updated, employers should still prepare to handle claims under the new procedures, benefits attorneys advise.
The final rule, published in the Federal Register in December 2016, originally was to apply to all claims submitted as of Jan. 1, 2018, but last November, the DOL delayed the final rule's implementation date by 90 days.
The rule is intended to give U.S. workers new procedural protections when dealing with plan fiduciaries and insurance providers that deny their claims for disability benefits. In brief, the rule:
- Requires that the reason for a denied claim be provided as soon as possible and sufficiently in advance of the date that the plan's decision on appeal is due, to give the claimant a reasonable opportunity to respond.
- Ensures that disability claimants receive a clear explanation for why their claim was denied as well as information on their rights to appeal a denial and to review and respond during the course of an appeal to any new or additional evidence the plan relied on in connection with the claim.
- Requires that a claims adjudicator cannot be hired, promoted, terminated or compensated based on the likelihood of denying claims.
The new procedures apply to any claims for disability benefits made under an employee benefit plan covered by the Employee Retirement Income Security Act (ERISA).
Not Just 'Disability' Plans
"The regulations could impact retirement plans, medical coverage and other types of benefits," said Steven Mindy, a partner in Alston & Bird's compensation, benefits and ERISA litigation practice in Washington, D.C.
While the procedures pertain to short-term and long-term disability plans, "it's not the title of the plan that matters, it's the nature of the benefits and whether the claim is based on a finding that the person is disabled," Mindy explained. "A retirement plan might have a provision where a committee decides whether or not an employee is disabled for purposes of receiving a disability retirement. In this case, the new disability claims procedures would need to be implemented for the retirement plan."
"A profit sharing plan might condition receipt of a share of a contribution on a participant remaining employed until year end, or working up to 1,000 hours in a year, and those terms often make exceptions if the person failed to meet the standard as a result of becoming disabled," said benefits attorney Carl Lammers, managing associate at law firm Frost, Brown Todd in Louisville, Ky. Among other examples he offered:
- A life insurance program might waive further payment of premiums for any period while the participant is disabled.
- Nonqualified deferred compensation or supplemental retirement plans—sometimes referred to as "top hat" plans—may have different benefits, payment terms or entitlements based on disability.
If disability decisions made as of April 1, 2018, do not comply with the new disability claims procedures and the claim is later litigated, participants can sue under ERISA and the regulations, Mindy noted. "If you don't follow the new rules, the participant can get to court more quickly and can avoid the internal claims-review process, which puts the plan in an unfavorable position."
"A court will give no deference to an administrative determination, nor limit review to the facts and documents that were assembled as the administrative record," Lammers noted.
"Even if the employer is not able to get their documents amended to include the new provisions, they should start following the new claims procedures with respect to processing claims received" and work to amend plan documentation as soon as possible, Mindy advised.
Fully Insured vs Self-Funded Plans
If employers have fully insured plans, they should monitor their insurance providers to ensure that the new procedures are being followed, Mindy said. "For the most part, insurers have started implementing these procedures" and they have reason to do so, since the courts can hold them liable as plan fiduciaries for a fully insured plan, he noted.
For self-funded plans, typically managed by a third-party administrator (TPA), "there's obviously more for plan sponsors to look at" because the employer bears greater liability for noncompliance.
If a TPA determines a disability claim is valid, "either the plan document, insurance contract or service agreement—as applicable—needs to require that that third party comply with the new DOL rules," Lammers said.
Plan sponsors should issue a summary of material modifications (SMM) for the summary plan description. The SMM should outline the disability claims procedure changes and be distributed to participants within 120 days after the end of the plan year in which the change is made, as ERISA and the DOL require.
"Fast action is needed for a plan that is primarily focused on providing disability income, but most employers will find they rely on an insurance carrier or third-party administrator to make the needed operational and document changes on these plans," Lammers said. "The less obvious application of these rules to other types of benefits programs—like retirement plans—will place a higher burden on employers for analysis and action before the first disability claim is received after April 1."
"Practically speaking, the changes to the documents will be fairly small, but the changes need to be communicated," Mindy noted.
Author: By Stephen Miller, CEBS
Source: Society for Human Resource Management (SHRM)