The Second Circuit has issued an important decision addressing the consequences of a plan's failure to comply with the Department of Labor's (DOL's) claims regulations when a participant or beneficiary brings suit in court under the Employee Retirement Income Security Act of 1974 (ERISA). These issues include:

(Halo v. Yale Health Plan, 819 F.3d 42 (2d Cir. 2016).)

The participant in the case, a student covered under her university's health plan, had surgery performed by doctors outside the plan's provider network. Because the treatment was out-of-network, it was covered under the plan only if either:

The plan rejected the participant's claims for coverage, and the participant sued the plan in district court, alleging violations of the DOL's claims procedure regulations regarding the timing and content of the plan's benefit denial notices (29 C.F.R. § 2560.503‐1) (see Practice Note, Internal Claims and Appeals Under the ACA). For example, one of the plan's notices explained a benefits denial by tersely stating that the "service [was] not authorized."

The district court concluded that if a plan, in exercising discretionary authority to deny a benefits claim, fails to comply with the DOL claims regulations, a reviewing court should apply the less deferential "de novo" standard of review in analyzing the claim. The district court added, however, that if a plan substantially complies with the claims regulations, then the more deferential "arbitrary and capricious" standard of review applies. The district court applied this "substantial compliance" doctrine in concluding that the plan's communications with the participant, though not ideal, demonstrated an exercise of discretion by the plan sufficient to satisfy the substantial compliance standard. As a result, the district court reviewed the plan's decision to deny benefits under the arbitrary and capricious standard. The district court also held that claimants are entitled to civil penalties under ERISA if a plan fails to comply with the DOL claims regulations.

On appeal, the Second Circuit rejected the district court's holdings regarding standard of review and civil penalties. The court offered a thorough discussion of the history of the DOL's claims regulations, which, in its view, represent a balance between protecting employees and encouraging employers to provide benefits. Specifically, the court noted that plans that comply with the claims regulations receive the benefit of:

Moreover, the Court rejected the district court's conclusion that the more deferential standard of review should apply if a plan substantially complied with the claims regulations. The court reasoned that the DOL had disavowed the substantial compliance doctrine in issuing updated claims regulations in 2000. Those claims regulations instead included a provision under which a plan's failure to establish or follow reasonable procedures meant that a claimant:

(29 C.F.R. § 2560.503‐1(l).)

As a result, the Second Circuit held that a plan's failure to comply with the DOL claims regulations in denying a benefit claim generally results in the claim being reviewed under the less deferential de novo standard in federal court (see Practice Note, ERISA Litigation: Standard of Review). However, an exception to this general rule exists for a plan that:

A plan that makes this showing is entitled to the more deferential arbitrary and capricious standard of review.

The Second Circuit also held that a claimant is not entitled to civil penalties under ERISA for a plan's failure to comply with the claims regulations (see Practice Note, ERISA Litigation: Penalties for Failing to Provide Documents). Among other reasons, the Second Circuit noted that:

Lastly, the Second Circuit concluded that a district court may, in its discretion, consider a plan's failure to comply with the claims regulations as good cause to permit the introduction of additional evidence outside the administrative record. The Second Circuit acknowledged that district courts typically limit their review to the administrative record before the plan at the time it denied the claim. However, expanding on existing caselaw, the Second Circuit concluded that good cause to admit additional evidence may exist if the plan's failure to comply with the claims regulations adversely affects development of the administrative record.

The outcome in this case is a mixed bag for plans facing litigation in the Second Circuit. First the good news: Plans will welcome the Second Circuit's conclusion that participants and beneficiaries are not entitled to civil penalties under ERISA for a plan's failure to comply with the DOL claims regulations. However, although this case was governed by the claims regulations in place before changes under the Affordable Care Act (ACA), it should be noted that noncompliance with the ACA provisions may result in penalties (see Practice Note, Internal Claims and Appeals Under the ACA).

The Second Circuit's holding regarding the standard of review is less favorable for plans, particularly because the applicable standard of review (deferential or not) can be outcome-determinative in some cases. We expect to see future litigation in the Second Circuit addressing whether a plan's failure to satisfy the claims regulations was inadvertent and, perhaps more importantly, whether the failure was harmless. Also, the Second Circuit notes (in a footnote) that its analysis may be affected by the ACA's changes to the claims regulations. Under enhancements to the claims procedures under the ACA and its implementing regulations, and subject to certain exceptions, if a plan or insurer does not "strictly adhere" to the internal claims and appeals requirements, a claimant:

(See Practice Note, Internal Claims and Appeals Under the ACA: Strict Compliance Rule Under IFR.)

The Second Circuit's holding regarding the scope of the administrative record in benefits litigation is also noteworthy, as it may diminish a plan's ability to shape the evidence before a reviewing court in certain circumstances, and allow claimants to introduce additional evidence.