Final DOL Disability Claims Regulations Require Notice of Contractual Limitations Periods

Practical Law Legal Update w-005-0638 (Approx. 9 pages)

Final DOL Disability Claims Regulations Require Notice of Contractual Limitations Periods

by Practical Law Employee Benefits & Executive Compensation

Applicability Date of Final Regulations

The final regulations apply to all claims for disability benefits filed on or after January 1, 2018.

Avoiding Conflicts of Interest

Under the final regulations, plans that cover disability benefits must ensure that:

Disability claims are decided 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 may not:

Pay bonuses based on the number of benefit 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.

Clarifications Regarding the Independence and Impartiality Rules

Although the conflict of interest provision was largely unchanged from the proposed regulations, a DOL clarification adds vocational experts to the examples of persons involved in the decisionmaking process who must be insulated from a plan's or insurer's conflict of interest. Commenters asserted, and the DOL agreed, that vocational experts often:

Are actively involved in the decisionmaking process for disability claims.
Play a role in the claims process similar to that of medical or health care professionals.

The DOL also clarified that the independence and impartiality requirements apply even if a plan does not directly hire or compensate the individuals involved in making claim determinations. According to the DOL, the rule:

Is not limited to individuals that the plan directly hires.
Reaches individuals hired or compensated by third parties engaged by the plan regarding claims.

As a result, if a plan's service provider is in charge of hiring, compensating, terminating, or promoting an individual involved in claims decisionmaking, the plan must take steps (for example, through the terms of its service contract or ongoing monitoring) to ensure that the service provider's policies, practices, and decisions regarding hiring, compensating, terminating, or promoting covered individuals are not based on the likelihood that the individual will support the benefit denial (see Practice Note, Negotiating ERISA Service Provider Agreements).

The DOL declined to add a rule that would have required plans to disclose certain quantifiable information regarding its relationship with consultants (for example, the number of times the plan relied on a third-party vendor who hired the expert in the past year).

Expanded Disclosure Requirements

The DOL proposed to 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 (see Discussion of the Decision).
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 on request at the initial claims stage (as opposed to being provided that information for the first time in a denial notice at the appeal level).

The final regulations adopt these three provisions, though with certain revisions. (Regarding the third provision, although the existing DOL claims regulations provide that claimants challenging an initial claim denial may request relevant documents, a statement informing claimants of their right to relevant documents is currently required only in denial notices on appeal.)

Discussion of the Decision

In adopting the first of these provisions in its final regulations (with some changes), the DOL noted that the discussion-of-decision rule is not met merely by stating that a plan or reviewing physician disagrees with the treating physician or health care professional. Instead, the denial notice must include a discussion of the basis for disagreeing with the health care professional's views. The DOL also expanded this provision to expressly include vocational professionals.

The DOL revised this provision to clarify that disability claim denial notices must contain a discussion of the basis for disagreeing with the views of medical or vocational experts whose advice was obtained on the plan's behalf in connection with a denial, regardless of whether the advice was relied on in making the benefit determination. As a result, if a claims decisionmaker consults several experts, some of whom support a decision to grant the claim, the basis for disagreeing with these experts' views must be reflected in the discussion.

Also, the provision addressing the basis for disagreeing with disability determinations of "other third party payors" was limited to include only disability determinations made by the SSA. The DOL agreed with commenters that it would be unreasonable to require plan fiduciaries to go outside the plan's controlling documents and address a judgment about a disability determination made by some other party that is based on another plan disability definition (which could be entirely different or inconsistent with the governing plan's definition). However, the DOL did not have these concerns regarding SSA determinations, and disability denial notices must contain a discussion of the basis for disagreeing with SSA disability determinations that are presented by the claimant to the plan.

Under the final regulations, a discussion of the decision must also include, for disability denials based on a medical necessity, experimental treatment, or similar exclusion or limit, either:

An explanation of the scientific or clinical judgment for the determination, applying the plan terms to the claimant's medical circumstances.
A statement that this explanation will be provided free of charge on request.

Right to Review and Respond to New Information

The final regulations provide disability claimants with a right to review and respond to new information developed by the plan while an appeal is ongoing (though this requirement was modified from the proposed regulations). The plan must provide the claimant with:

New or additional evidence considered, relied on, or generated by the plan, insurer, or other person making the benefit determination (or at these entities' direction) during the "pendency of the appeal" 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.

The new information must be provided to the claimant:

As soon as possible.
Sufficiently in advance of the date on which the denial notice on review must be provided so that the claimant has a reasonable opportunity to address the evidence or rationale before that date.

The plan also must consider any response from the claimant as part of its decisionmaking. According to the DOL, claimants are deprived of their right to full and fair review (under ERISA Section 503) when they are prevented from responding to evidence and rationales at the administrative claims level (29 U.S.C. §1133). The DOL dismissed commenters' concerns that the new rules could result in an endless loop of submissions to the plan.

The DOL eliminated a provision that would have afforded claimants the opportunity to respond to new information by presenting written evidence and testimony. However, the DOL noted that this change should not be viewed as restricting a claimant's rights to present evidence generally.

Plans may not satisfy the new review and response requirements:

Through a process (characterized by some commenters as widespread) of offering claimants a voluntary opportunity to appeal any rationale raised for the first time in an appeal denial letter.
By providing claimants a notice informing them that the plan relied on new or additional evidence (or a new or additional rationale) in denying the claim, and offering to provide the new evidence or rationale on request.

Rather, a plan or insurer must send the new or additional evidence or rationale automatically to the claimant as soon as it becomes available to the plan.

Timing Considerations

Regarding timing, the DOL indicated that new or additional evidence must be provided to claimants at the point when the plan decides it is going to deny a claim on appeal (and sufficiently in advance of final decision so that the claimant can address the evidence). However, the provision does not require plans to provide the information:

In a piecemeal fashion.
Without knowing whether, and if so how, the information may impact the plan's decision.

Deemed Exhaustion of Claims and Appeals Process; Strict Compliance Standard

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 (29 C.F.R. § 2560.503-1(l); see Practice Notes, ERISA Litigation: Causes of Action Under ERISA Section 502 and ERISA Litigation: Exhaustion of Plan Claims Procedures). The final regulations 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, unless the plan meets the minor errors exception (see Practice Note, Internal Claims and Appeals: Consequences of Noncompliance: Strict Compliance Under IFR and Minor Errors Exception).

Also, a claimant may request from the plan a written explanation of the violation. The plan must provide this explanation within ten days, including a specific description of any bases for asserting that the violation should not cause the administrative remedies available under the plan to be deemed exhausted. If a court rejects the claimant's request for immediate review on the basis that the plan met the standards for the exception, the claim is considered as re-filed on appeal as of the plan's receipt of the court's decision. Within a reasonable time after the receipt of the decision, the plan must provide the claimant with notice of the resubmission.

Minor Errors Exception

The minor errors exception excuses 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 must provide a claimant, on request, with an explanation of the plan's basis for asserting that it met the minor errors exception.

Coverage Rescissions

A coverage rescission is a rescission of disability benefit coverage that has retroactive effect, unless attributable to a failure to timely pay required premiums or contributions towards the cost of coverage. The final regulations, which adopted the proposed version without change, 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).

Disability Pension Benefits

According to the DOL, a retroactive reduction or elimination of disability pension benefits under ERISA Section 305 is not a coverage rescission under the disability claims procedures (29 U.S.C. § 1085). However, a retroactive reduction or elimination of disability pension benefits resulting from a finding by the plan that the claimant was not disabled (under the plan's terms) when the disability pension benefits were reduced or eliminated under ERISA Section 305, would be a benefit denial under the DOL's claims regulations.

Culturally and Linguistically Appropriate Notices

The final regulations add protections for individuals who are not fluent in English. Specifically, if a claimant's address is in a county where 10% or more of the population is literate only in the same non-English language (based on federal census information), benefit denial notices must include a statement prominently displayed in the applicable non-English language clearly indicating how to access language services provided by the plan (see Practice Note, Internal Claims and Appeals: Providing Notices in a Culturally and Linguistically Appropriate Manner). In these situations, the plan must also 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.
Written notices in the non-English language on request.

These standards do not supersede summary plan description (SPD) foreign language rules that include a requirement to offer assistance (and language services) that enable participants to become informed of their plan rights and obligations (29 C.F.R. § 2520.102-2(c); see SPD Compliance Chart for ERISA Plans). According to the DOL, non-English speaking participants could be eligible for language services under either the final regulations or the SPD rules, depending on the circumstances.

Contractual Limitations Periods for Challenging Benefit Denials

In implementing its final regulations, the DOL indicated that a plan's claims procedures do not satisfy ERISA's requirement to provide "full and fair review" of benefit denials if the plan includes a contractual limitations period that expires before the review is concluded. The DOL also agreed with those federal courts that have held that the existing claims regulations can be interpreted to require some basic disclosure of contractual limitations periods in benefit denials.

As a result, the final regulations include a new requirement that benefit denial letters on review must include a description of any applicable contractual limitations period and its expiration date. Although this requirement technically applies only to disability benefit claims, the DOL believes that a similar disclosure requirement also should apply for other types of benefits.

Practical Impact

In justifying the need to update its claims procedures for disability benefits, the DOL noted that although fewer private-sector employees participate in disability plans than in group health and other types of plans, disability cases dominate the ERISA litigation landscape today (see ERISA Litigation Toolkit).

As with the proposed regulations, many of the changes under the DOL's final rules will be familiar to those who have worked with the ACA's claims and appeals enhancements to the group health plan claims procedures. Probably the biggest surprise under the final regulations is the DOL's addition of the requirement that benefit denial notices describe any applicable contractual limitations period governing a claimant's right to bring an action under ERISA Section 502(a). Whether this information is required 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). The scope of information regarding contractual limitations periods that is sufficient also may depend on controlling judicial precedent and the facts and circumstances of the disability claim. Of course, including this information will require additional tailoring and calculations on the part of plan and claims administrators in preparing benefit denial letters once the regulations apply beginning in 2018.

Also, the final regulations' independence and impartiality provisions may have implications for plan service providers, including to require plan oversight of service provider practices and contractual language addressing how the service provider carries out decisions such as hiring and terminating of covered individuals.

Final DOL Disability Claims Regulations Require Notice of Contractual Limitations Periods | Practical Law