DOL Rules for Disability Claims Include Changes for Denial Notices

Practical Law Legal Update w-000-8223 (Approx. 6 pages)

DOL Rules for Disability Claims Include Changes for Denial Notices

by Practical Law Employee Benefits & Executive Compensation

Conflicts of Interest

The current DOL regulations require plan decisionmakers to meet certain standards of independence, and the proposed rules would add new criteria to limit conflicts of interest among plan decisionmakers. Specifically, the proposed rules would require plans that cover disability benefits to ensure that:

Disability claims are reviewed in a way that ensures the independence and impartiality of plan decisionmakers.
Decisions regarding hiring, compensation, termination, promotion, or other similar matters are not made based on the likelihood that an individual (for example, a claims decisionmaker or medical expert) will support the denial of disability benefits.

For example, a plan could not:

Pay bonuses based on the number of benefits denials made by a claims decisionmaker.
Contract with a medical expert based on the expert's reputation for outcomes rather than the expert's professional qualifications.

Disclosure Requirements

The proposed rules would expand the requirements for disability denial notices to include:

A discussion of the plan's decision, including the basis for disagreeing with any disability determination by the Social Security Administration (SSA), treating physician, or other third party payor, to the extent that the plan did not follow the determinations presented by the claimant.
The plan's internal rules, guidelines, protocols, standards, or other similar criteria used in denying the claims (or a statement that they do not exist).
A statement that the claimant is entitled to receive relevant documents upon request at the claims stage (as opposed to being provided that information for the first time in a denial notice at the appeal level).

Right to Review and Respond to New Information

The proposed rules would provide disability claimants with a right to review and respond to new information developed by the plan while an appeal is ongoing. Specifically, before a plan's decision on appeal, the plan would need to provide the claimant with:

Any new or additional evidence considered, relied upon, or generated by the plan in connection with the claim, free of charge.
Any new or additional rationale for a denial (for example, a new medical report), free of charge.
A reasonable opportunity for the claimant to respond to new information by presenting written evidence and testimony. (In a footnote, the DOL clarified that this rule does not entitle claimants to an oral hearing.)

Under the proposed regulations, the new information must be provided to the claimant:

As soon as possible.
Sufficiently in advance of the applicable deadline, including extensions.

The plan would be required to consider any response from the claimant as part of its decisionmaking.

The DOL requested comments regarding whether changes to the claims procedures' existing timing rules are needed to satisfy the new review and response rights.

Deemed Exhaustion of Claims and Appeals Process

Under the existing claims regulations, if a plan fails to establish or follow compliant claims procedures, a claimant is deemed to have exhausted the plan's administrative remedies and may instead pursue remedies under ERISA (see Practice Note, ERISA Litigation: Causes of Action Under ERISA Section 502) (29 C.F.R. § 2560.503-1(l)). The proposed rules would strengthen the deemed exhaustion provision by:

Incorporating, with regard to disability claims, the ACA's more stringent standards for group health plan claims if the plan fails to establish or follow reasonable claims procedures (see Practice Note, Internal Claims and Appeals: Consequences of Noncompliance: Strict Compliance Under IFR), unless the plan meets the minor errors exception (see Minor Errors Exception).
Providing that a reviewing court should review a claim de novo (as opposed to using the more deferential standard of review), assuming the minor errors exception does not apply.
Providing a special safeguard for claimants who take their claim directly to court, if the court rejects the claimant's request for review because the plan met the minor errors exception.

Minor Errors Exception

The minor errors exception would excuse a plan's failure to establish or follow reasonable claims procedures if the violation was:

De minimis.
Non-prejudicial.
Attributable to good cause or matters beyond the plan's control.
In the context of an ongoing good-faith exchange of information.
Not reflective of a pattern or practice of noncompliance.

The plan would be required to provide a claimant, upon request, with an explanation of the plan's basis for asserting that it met the minor errors exception.

Coverage Rescissions

A coverage rescission is generally a retroactive cancellation or discontinuance of disability coverage. The DOL claims regulations already apply to rescissions that are the basis (in whole or in part) for a benefits denial.

The proposed rules would expand the definition of "adverse benefit determination" to include all rescissions of disability benefit coverage, even where there is not an adverse effect on a particular benefit at that time (for example, where a participant or beneficiary was not receiving disability benefits at the time of rescission). According to the DOL, the new definition is modeled on the definition of rescission under the ACA's claims procedures enhancements for group health plan claims (see Legal Update, ACA Final Rules Expand Claims Procedure Rules and More), but would not be limited to rescissions based on fraud or intentional misrepresentation of material fact.

Culturally and Linguistically Appropriate Notices

The proposed rules would add protections for individuals who are not fluent in English. Under the proposed rules, plans would be required to provide disability denial notices in a culturally and linguistically appropriate manner if the claimant's address is in a county where 10% or more of the population residing in that county are literate only in the same non-English language, as determined based on American Community Survey data (see Practice Note, Internal Claims and Appeals: Providing Notices in a Culturally and Linguistically Appropriate Manner). In these situations, the plan would be required to:

Include a prominent one-sentence statement in denial notices, in the relevant non-English language, about the availability of language services.
Provide a customer assistance process (for example, a telephone hotline) with oral language services in the non-English language, such as answering questions and providing assistance with filing claims and appeals in the applicable non-English language.
Provide written notices in the non-English language upon request.

The DOL noted that 255 US counties currently meet the 10% threshold.

Practical Impact

Many of the changes in the DOL's proposed rules will be familiar to those who have worked with the ACA's claims and appeals enhancements to the group health plan claims procedures. At least some of the changes, however, are specific to disability claims (for example, notice disclosures when a plan disagrees with an SSA or treating physician's disability determination). If these rules are finalized as proposed, they may tip the scales in favor of disability claimants in plan administrative claims and, potentially, in disability benefits litigation (for example, the DOL's proposed deemed exhaustion rule and safeguard for claimants who incorrectly conclude that the plan has violated the DOL claims procedures).

While the new review and response rights for claimants under these rules would (as the DOL envisions) promote a back-and-forth dialogue between claimants and plans, they could also extend the claims process, leading to tension with the DOL’s goal of providing efficient administrative claims decisions. The DOL appears to recognize that the existing timing rules for deciding disability claims may be too short to accommodate this lengthier dialogue, and therefore seeks comments on whether those timing rules should be changed.

If finalized, the proposed rules would also have a significant impact on plan notices involving disability claims and appeals. For example, notices would have to expressly indicate why a plan decisionmaker disagreed with, and declined to follow, an SSA or treating physician's disability determination. In addition, under the proposed minor errors exception, plans would need to be able to furnish claimants, on request, a notice indicating:

Why the plan believes it has generally satisfied the claims procedures' requirements.
That any violations fall within the minor exceptions error.

Given the consequences if the DOL's proposed minor errors exception is not satisfied (which include potential loss of deferential review for a plan's administrative decision), it is possible that disputes regarding the exception's applicability could be heavily litigated in their own right.

Among other issues, employers and their advisors may wish to offer their comments regarding whether plans should provide claimants with notice, as part of the plan's notice on appeal, regarding any plan-imposed contractual limitations periods. As the DOL notes, this is an issue that has divided the circuit courts of appeals (see Legal Update, Circuit Courts Disagree on Whether Claim Denial Letters Must Provide Notice of Limitations Periods). Specifically, the DOL is considering a rule under which plans would be required to provide claimants with both:

A clear and prominent statement of a plan's limitations period, along with its expiration date for the claim at issue, as part of the plan's final claims notice on appeal.
An updated notice of that expiration date if tolling or another event causes that date to change.

DOL Rules for Disability Claims Include Changes for Denial Notices | Practical Law