Department of Labor Finalizes Claims and Appeals Regulations for Disability Benefits

By Hrishi Shah - Franczek Radelet P.C.

June 21, 2017

The Department of Labor’s (DOL) Employee Benefits Security Administration has issued final regulations that change the claims and appeals procedures for disability benefits provided by ERISA plans.  The final rules are substantially the same as the proposed rules the DOL had issued in November 2015.  The requirements set forth in the final rules essentially mirror the requirements for non-grandfathered welfare plans under the Affordable Care Act (ACA).  However, unlike the ACA’s enhanced claims procedures, these final rules amend ERISA’s claims regulations for all plans, and therefore apply to both grandfathered and non-grandfathered welfare plans, as well as retirement plans that offer disability benefits.  According to the DOL, the rules are aimed at improving “basic procedural protections” for participants, and to foster transparency and accountability.  Below is a summary of the major provisions of the final regulations. 

Avoiding Conflicts of Interest

The final regulations supplement existing standards under ERISA’s disability claims procedure for avoiding conflicts of interest.  The rules provide that a plan may not make any decisions regarding hiring, compensation, termination, promotion, or other similar matters with respect to any individual, such as a claims adjudicator, medical expert, and vocational expert, based on the likelihood that the individual will support the denial of benefits (the final rules added “vocational expert” to the list of decision-makers to whom the rules apply).  Under the final rules, plans would not be permitted to contract with, or provide bonuses or additional compensation to an outside medical or vocational expert based on the expert’s reputation for outcomes in contested cases for disability benefits (as opposed to the expert’s professional qualifications).

The preamble to the final regulations also clarifies that the independence and impartiality requirements are not limited to individuals that a plan directly hires, but also extends to individuals hired or compensated by third parties engaged by the plan to assist with adjudication of disability claims.  For example, if a plan’s service provider is responsible for hiring, compensating, terminating, or promoting an individual involved in making a decision, the plan must take steps (e.g., by including the appropriate terms in its service agreement with and ongoing monitoring of the provider)  to ensure that the service provider’s policies, practices, and decisions regarding the hiring, compensation, termination, and promotion of the individual are not based upon the likelihood that the individual will support the denial of disability benefits.

Enhanced Disclosure Requirements

The final rules amend the current disclosure requirements for disability claims in five ways, two of which were not present in the proposed rules issued in November 2015:

1. Basis for disagreeing with disability determinations. Adverse benefit determinations at both the initial claim stage and appeal stage must include a discussion of the decision, including the basis for disagreeing with any disability determination made by the Social Security Administration (SSA), the claimant’s treating physician, or vocational professional who evaluated the claimant, to the extent that the plan does not follow such determinations.

2. Expert opinions obtained on behalf of the plan. Under the final rules, plans must provide to a claimant the views of medical or vocational experts whose advice was obtained on behalf of the plan in connection with the adverse benefit determination, without regard to whether the experts’ advice was relied upon in making the determination.  This requirement was not present in the proposed rules issued in November 2015, and was added in the final rules.    

3. Statement of the criteria used to deny the claim. The final rules provide that an adverse benefit determination must state the internal rules, guidelines, protocols, standards, or other similar criteria the plan used to deny a claim, or a statement that such criteria do not exist.

4. Notice of the right to review relevant documents at initial claim stage. Under the final rules, adverse benefit determinations at the initial claim stage must contain a statement that the claimant is entitled to receive, upon request, any relevant documents used in adjudicating the claim.  Under the current claims procedures, such a statement is required only at the appeal stage.

5. Contractual limitations period to bring suit. The final rules also added a requirement that appeal denial letters provide notice to claimants of any applicable contractual limitations period regarding the claimant’s right to file suit in court.  

Right to Review and Respond to New Information before Final Decision on Appeal   

The final regulations provide that during the appeal stage of an adverse benefit determination, the claimant must have the opportunity to review and respond to any new information or evidence considered, relied upon, or generated by the plan that was not considered at the initial claim level before the plan makes a decision on appeal.  Under the current claims regulations, claimants only have the right to receive such new information upon request after a final decision has already been made during the administrative review process.

Specifically, the final rules require that during the pendency of an appeal, the plan must automatically provide (not only upon the claimant’s request) to the claimant any new information not considered at the initial claim stage.  The plan is required to provide such new information to the claimant as soon as possible before the plan’s appeal decision is made, in order to give the claimant a reasonable opportunity to respond to the new evidence.  The plan is also required to consider any response, in the form of written testimony or evidence, from the claimant to the new information.  If the claimant’s response to the new evidence causes the plan to generate additional new evidence, the additional new evidence must, in turn, also be automatically provided to the claimant as soon as possible before the plan’s appeal decision is made, to give the claimant a reasonable opportunity to respond to the additional evidence.      

“Deemed Exhaustion” of Claims and Appeals Processes with Minor Error Exception

Under the final rules, if a plan fails to follow all of the requirements under the DOL’s claims procedures, the disability claimant will be deemed to have exhausted the plan’s administrative remedies and be permitted to file a lawsuit immediately.  The rules provide that when a claimant is deemed to have exhausted administrative remedies, his/her claim is deemed to have been denied on review without the exercise of fiduciary discretion.  Accordingly, in such a case, the reviewing court would not provide deference to the plan’s decision, but rather review the dispute on a de novo basis.

However, the final rules also set forth an exception for minor claims procedure errors committed by the plan.  Under the rules, a disability claimant is not deemed to have exhausted administrative remedies if the plan’s violation of the claims procedures was (1) de minimis; (2) non-prejudicial to the claimant; (3) attributable to good cause or matters beyond the plan’s control; (4) in the context of an ongoing good-faith exchange of information; and (5) not reflective of a pattern or practice of non-compliance.  The claimant would be entitled, upon request, to an explanation of the plan’s basis for asserting that it meets the standard to invoke this exception.

In addition, the final rules provide protection for claimants who erroneously conclude that their administrative remedies have been deemed exhausted due to a plan’s violation of the claims procedures, and decide to take their claims directly to court.  If a court rejects the claimant’s request for immediate review on the basis that the plan meets the minor error exception (described above), the claim is considered re-filed on appeal upon the plan’s receipt of the court’s decision.  At that juncture, the plan is required to provide the claimant notice of the re-filing, and the claimant then has the right to pursue the claim at the plan’s internal appeal stage.

Coverage Rescissions as Adverse Benefit Determinations

The final rules provide that a rescission of disability coverage (cancellation or discontinuation of coverage with retroactive effect, except due to non-payment of premiums) is considered an “adverse benefit determination” for purposes of the claims procedures, even without an accompanying denial of a claim for benefits.  Under the current claims procedures, a rescission of coverage would be considered an adverse benefit determination only if the rescission is the basis for a denial of a claim for benefits (e.g. a plan denies an individual’s disability claim because it discovers that the individual is not eligible for disability coverage under the plan).  The final rules provide, however, that a rescission of disability benefit coverage, even in the absence of an accompanying claim denial, would be considered an adverse benefit determination, and would therefore trigger applicable procedural rights under the claims procedures.

Culturally and Linguistically Appropriate Notices

The final rules provide that plans must provide notices in a “culturally and linguistically appropriate” manner.  Under this requirement, when an adverse benefit determination notice is sent to a claimant who lives in a county where 10 percent or more of the population is literate only in the same non-English language, the notice of adverse benefit determination must include a prominent one-sentence statement in the relevant non-English language about the availability of language assistance services.  In addition, the plan is required under the final rules, to provide, upon request, an assistance process (such as a telephone hotline) with oral language services and written notices in the non-English language.  Oral language services include answering questions and providing assistance with filing claims and appeals in the applicable non-English language.   

The counties that meet the 10 percent threshold are determined based on Census Bureau population data and are listed here. Only four non-English languages currently meet the 10 percent threshold in any county: Spanish (which is the applicable non-English language in the vast majority of the counties that exceed the 10 percent threshold), Chinese, Tagalog, and Navajo.

These rules go into effect for disability claims that are received on or after January 1, 2018.  Plan sponsors may be required to amend their plan documents and claims procedures to comply with the more stringent rules set forth in these regulations, and ensure that claim and appeal determinations are handled in operational compliance with these rules.  Please contact us for any necessary assistance with your compliance efforts.