On December 19, 2016, the U.S. Department of Labor published new regulations on disability claims for certain plans governed by the Employee Retirement Income Security Act of 1974, as amended (ERISA). The regulations will require that employers make significant changes to their disability benefits claims procedures. The regulations are effective on January 1, 2017, but do not apply to claims for disability benefits filed before January 1, 2018.

The new regulations affect any plan that offers disability benefits. A benefit is a “disability benefit” if the participant must make a showing of disability as a condition to receive the benefit. This obviously covers long-term and short-term disability plans. But retirement plans, group health plans and other welfare plans may also need to be amended to comply with the new regulations.

With the upcoming inauguration of President-elect Donald Trump, uncertainty abounds regarding regulations that are currently being promulgated. However, this regulation will become effective before President-elect Trump takes office. This generally means that the regulation will be effective until new regulations take its place, a process that can take years to complete.

Background

Section 503 of ERISA generally requires employers to provide adequate notice to plan participants whose claims for benefits have been denied, and to provide the participant a full and fair process for review of the claim denial. Citing the growth of disabilities benefits litigation, the U.S. Department of Labor issued the new regulations in an attempt to increase transparency and fairness to participants. The new regulations establish certain procedural requirements for employers to act in compliance with their general fiduciary duties under Section 503.

Changes to the Existing Regulations

The new regulations modify the procedures for disability benefits claims in a variety of ways. For example, the new regulations add the following requirements:

• Plan must provide more detailed description of denial: Benefit denial notices are required to include a more complete discussion of why the claim was denied. If applicable, the notification of denial must include a discussion of why the plan disagreed with the findings of health care professionals, vocational experts, or determinations made by the Social Security Administration.
• Disclosure of internal protocols used: Plan administrators must disclose the specific internal rules, guidelines, or protocols used in making a determination regarding benefits. Alternatively, the plan administrator must disclose if no such procedure was used.
• Employees have the right to inspect the claim file: Benefit denial notices must inform participants that they are entitled to reasonable access to, and copies of, all documents that are relevant to the participants’ claim for benefits, free of charge.
• Employees must have access to new evidence on appeal: After a denial of benefits has been made, the participant must be given a full and fair opportunity to appeal the decision. The new regulations require plan administrators to provide participants, free of charge, any new or additional evidence being reviewed on appeal.
• Plans must avoid conflicts of interest: Plans are generally required to make benefit determinations in a manner that ensures the independence and impartiality of the individuals involved. The new regulations make it clear that plans may not make decisions regarding hiring, firing, promotions, or other similar employment decisions on the basis of the likelihood that an individual will support the denial of benefits. Further, plans may not provide bonuses on the basis of denials made by a claims adjudicator.
• New procedures regarding rescissions of coverage: Certain rescissions of coverage must be treated as adverse benefit determinations. A rescission may occur when an employer cancels, discontinues, or terminates coverage with a retroactive effect. This will entitle participants to appeal the rescission of coverage. However, rescissions for non-payment of premiums are not treated as adverse benefit determinations.
• Notice must be written in linguistically and culturally appropriate manner: This requires plans to accommodate those participants that do not speak English. Plans must provide notice that oral language services are available. Further, plans must provide that the participant may, upon request, receive any notice in the applicable non-English language.

For employers offering disability benefits, failing to strictly adhere to the new regulations will allow participants to pursue remedies on the basis that the plan failed to provide a reasonable claims procedure. A participant will be immediately allowed to bring a denial of benefits lawsuit in court. This rule will generally apply unless the failure did not cause prejudice to the participant, was for good cause, and was not a part of a pattern of non-compliance.

Action Items

To comply with the new disability claims regulations, employers and plan administrators should:

• Review all benefit plans to determine which ones offer “disability benefits” subject to the new regulations.
• Review their current disability claims procedures to determine if they comply with the new regulations.
• Prepare and adopt new disability claims procedures for applicable benefit plans and issue summaries of material modifications.
• Determine whether their denial of benefits notices comply with the new regulations and confirm with the insurer or third-party administrator that denial of benefits notices will comply with the new regulations.
• Determine whether their selection, compensation, and retention of claims adjudicators comply with the new regulations and, if not, make appropriate changes.
• Ensure procedures are in place to accommodate non-English languages.

Additional Information

If you have any questions regarding the disability claims procedure rules or need assistance amending your plan documents to comply with the new regulations, please contact your Kutak Rock LLP attorney or a member of the Kutak Rock Employee Benefits Practice Group listed in the right-hand column.