Denial of Benefits
Art by Tim Bower
If a plan sponsor fails to comply with the terms of a plan, in theory the plan could be disqualified, and the plan sponsor would need to take the appropriate method of correction under the Employee Plans Compliance Resolution System (EPCRS). Under Employee Retirement Income Security Act (ERISA) Section 404(a)(1)(D), a plan must be administered in accordance with its terms, unless those terms are inconsistent with ERISA.
The above rules are straightforward on their face, but, as with most rules, there can be exceptions and qualifications. For example, the phrase “any occupation” in a long-term disability plan cannot be given an absolute and literal meaning, such that a benefit could only be paid to an individual if he had no conscious life.
Similarly, while the Supreme Court’s decision in Kennedy v. Plan Administrator for Dupont Savings Plan emphasized the necessity for a plan administrator to comply with the terms of a plan, lower courts are still undecided as to whether that decision eliminated the substantial compliance doctrine, an issue that frequently arises in designation of beneficiary cases. So long as a plan contains Firestone language that provides the plan administrator with discretion to interpret the plan, the administrator may always insist upon strict compliance with the plan’s terms. An issue may arise, however, where an administrator wants to rely upon the substantial compliance doctrine in interpreting a plan.
The substantial compliance doctrine is not limited to compliance with the substantive provisions of a plan. This is because the doctrine often excuses plan administrators that don’t turn square corners in following ERISA regulations.
The Department of Labor (DOL) regulations contain a “deemed exhaustion” rule, which states that a plan’s administrative procedures will be deemed exhausted if the plan has failed to establish or follow certain claims procedures. Discussing this regulation in Halo v. Yale Health Plan in 2016, the 2nd Circuit held that, when denying a claim for benefits, if a plan fails to comply with the DOL’s claims procedure regulations, the claim will be reviewed de novo in federal court unless the plan has otherwise established procedures in full conformity with the regulation and can show that the failure to comply with the regulation, in processing the claim, was inadvertent and harmless.
As an illustration, when the DOL revised the claims procedure regulations with respect to disability claims, it provided that “if the plan fails to strictly adhere to all the requirements of this section [of the regulations] with respect to a claim … the claim on appeal is deemed denied on review without the exercise of discretion by an appropriate fiduciary.”
Further, the loss of deferential review is prevented only by “de minimis violations that do not cause, and are not likely to cause, prejudice or harm to the claimant so long as the plan demonstrates that the violation was for good cause or due to matters beyond the control of the plan and the violation occurred in the context of an ongoing, good faith exchange of information between the plan and the claimant.”
However, unlike the 2nd Circuit decision in Halo, in Edwards v. Briggs & Stratton Retirement Plan, the Court of Appeals for the 7th Circuit explained that “in general the doctrine of substantial compliance means that a plan administrator who has violated a technical rule under ERISA … may be excused for the violation if the administrator has been substantially compliant with the requirements of ERISA.” Although, as stated in Rasenack v. AIG Life Ins. Co., a plan administrator that does not render a decision within the time provided by the DOL regulations “can only be in substantial compliance with ERISA’s procedural requirements if there is an ongoing productive evidence-gathering process in which the claimant is kept reasonably well-informed as to the status of the claim and the kinds of information that will satisfy the administrator.”
Marcia Wagner is an expert in a variety of employee benefits and executive compensation areas, including qualified and nonqualified retirement plans and welfare benefit arrangements. She is a summa cum laude graduate of Cornell University and Harvard Law School and has practiced law for 32 years. Wagner is a frequent lecturer and has authored numerous books and articles.