DOL's Final Rule on Disability Benefits
Although rarely a high-profile item, there is no question that long-term disability cases are the most frequently litigated Employee Retirement Income Security Act (ERISA) claims. While excessive fee litigation against 401(k) plans and stock-drop cases garner headlines, a study of ERISA cases filed between 2006 and 2010 concluded that those involving long-term disability benefits accounted for 64.5% of benefits litigation.
This large volume of cases suggests there are issues with the processing of long-term disability claims. In 2012, the Department of Labor (DOL)’s ERISA Advisory Council urged its parent agency to re-examine claims procedures for disability benefits. In response, in November 2015, the DOL issued proposed regulations dealing with such procedures, intended to strengthen the protections and safeguards for disability claims by following the claims procedures for certain group health plans under the Patient Protection and Affordable Care Act (ACA).
The final regulations had an effective date of January 18 this year and an applicability date of claims for disability filed as of January 1, 2018.
One of the issues addressed in the final regulations was the treatment of contractual limitations periods for challenging denials of the claims. In 2013, in Heimeshoff v. Hartford Life and Accident Insurance Co., the U.S. Supreme Court upheld the use of contractual limitations periods in plan documents and insurance contracts. Addressing this issue in the final regulations, the DOL indicated that Section 503 of ERISA requires that plans give participants whose benefit claims are denied a reasonable opportunity to ask the plan fiduciary to conduct a full and fair review of that denial.
In the DOL’s view, a claims procedure would not satisfy this ERISA statutory requirement if the plan included a contractual limitation period that expired before the review was concluded. Second, the final regulations add a requirement that the notice of an adverse benefit determination on review must include a description of the applicable contractual limitations period and its expiration date.
Grounds to Go to Court
The final regulations also addressed the deemed exhaustion of a plan’s claims and appeals processes. The final rule provides that if a plan fails to adhere to all of the requirements of the claims procedure regulation, the claimant would be deemed to have exhausted his administrative remedies and, therefore, could proceed to court. There is an exception to this general rule mirroring the applicable standard for group health plans under the ACA. The limited exception applies only if the violation is: 1) de minimis, i.e., too minor to merit consideration; 2) nonprejudicial; 3) attributable to good cause or matters beyond the plan’s control; 4) arises in the context of a good faith exchange of information; and 5) not reflective of a pattern or practice of noncompliance. That is, the exception is much stricter than a substantial compliance section.
From the perspective of a plan administrator or an insurance company interpreting a long-term disability plan, the likely effect of this rule is loss of the court’s review or having the court review the determination on an arbitrary and capricious standard. While courts frequently assert that the arbitrary and capricious standard does not mean a plan’s decision will be rubber-stamped, a plan administrator’s decisions can be reversed by courts under the standard because it is a very low one to satisfy. In fact, almost all benefit plans have so-called “Firestone” language to ensure that this standard of review applies.
While the DOL lacks the authority to determine the standard that a court should apply in reviewing a plan administrator’s decision, the final regulations state that if a participant proceeds to court following a plan’s failure to follow all of its claims procedures, “the claim or appeal is deemed denied on review without the exercise of discretion by the appropriate fiduciary.”
How it Could Play Out
It will be interesting to see how this regulation plays out. In its final rule, the DOL noted that a number of commentators had objected to the rule on the basis that it would encourage claimants to circumvent a plan’s claims and procedures by seeking remedies in court in the event of insignificant missteps. The DOL disagreed but simply stated its view that the typical participant pursuing a disability benefits claim in the context of a full and fair review would not seek to go to court based upon such insignificant violations. The typical participant probably would not take such action, but his counsel, in the context of zealous advocacy, will likely look for any advantage to deprive a plan administrator of the arbitrary and capricious/abuse of discretion standard of review.
Marcia Wagner is an expert in a variety of employee benefits and executive compensation issues, including qualified and non-qualified 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 29 years. Wagner is a frequent lecturer and has authored numerous books and articles.