On December 19, 2016, the U.S. Department of Labor (DOL) issued final rules revising the claims procedures for ERISA plans that make disability determinations affecting plan benefits. The DOL noted that nearly two-thirds of all ERISA litigation involves claims under long-term disability plans, and the final rules are intended to improve the “full and fair review” of disability claims under ERISA § 503 and ERISA Reg. § 2560.503-1 by expanding the procedural requirements. It’s debatable whether the new procedures will actually cut down on the volume of future litigation once individuals have exhausted the appeals process, but the final rules should lead to a better administrative record for review during litigation.
The final rules generally make the disability claims procedures more consistent with the procedures for group health plans as modified by the Affordable Care Act (ACA), although the unique timelines for disability procedures remain intact, there is no fraud or material misrepresentation exception for a rescission of disability coverage, and there is no requirement for an external review process. If the ACA is repeal or replaced, the claims procedures for group health plans may become less comprehensive than the disability claims procedures which may not be affected by ACA repeal or replacement.
The new disability claims procedures become effective for disability claims filed on or after January 1, 2018. This effective date is not affected by the plan year, so a plan with a plan year that runs from July 1st to June 30th still has to comply with these requirements on January 1, 2018. On that date, the existing disclosure requirement for internal criteria relied upon in making an adverse benefit determination (or a statement that it doesn’t exist) will also become automatic, and the plan can no longer indicate it will provide the criteria upon request.
This article focuses on which types of plans may or may not be affected by the new rules and why. In order for the new rules to apply, both of the following must be true: (i) the plan must make disability determinations affecting plan benefits; and (ii) the plan must be subject to ERISA’s claims procedures.
Blanket Exceptions (any type of benefit)
ERISA § 4(b) provides certain identified plans with an exception from many of ERISA’s provisions including ERISA’s claims procedures. These exceptions include church and governmental plans meaning the benefits offered through those plans do not have to comply with the new disability claims procedures. This exception also means ERISA pre-emption does not apply, so even self-insured church and governmental plans must generally comply with any applicable state law requirements unless state law exempts them.
In the absence of any conflicting state law, it’s not unusual to see a church or governmental plan borrow from ERISA’s procedures for two reasons: (1) a third party administrator (TPA) is assisting the plan with claims and appeals administration and the plan has agreed to procedures consistent with the TPA’s practice for its other clients that are subject to ERISA’s claims procedures; and (2) following ERISA’s procedures is a good defense against a claim that the plan failed to provide an adequate review procedure.
An employer with an excepted plan that already voluntarily complies with some or all of ERISA’s claims procedures could revise the plan to voluntarily comply with some or all of the new disability claims procedures if it wanted to.
This blanket exception for church and governmental plans includes the types of plans separately described below, and we won’t mention it again under each category. For example, a disability plan might be subject to the new rules, but a disability plan that is also a church plan is not.
It seems obvious that disability plans make disability benefit determinations, but not all disability plans are subject to ERISA’s claims procedures.
Unless funded or fully-insured, many short-term disability (STD) plans qualify for ERISA’s payroll practices exception under ERISA Reg. § 2510.3-1(b) and are exempt from ERISA’s claims procedures. ERISA pre-emption does not apply to STD plans that are payroll practices which are subject to state law requirements. Absent any conflict with state law, it is common for these plans to voluntarily comply with all or part of ERISA’s claims procedures for the reasons described under Blanket Exceptions earlier, and an employer with an STD plan qualifying for the payroll practice exception could revise its plan to voluntarily comply with some or all of the new disability claims procedures if it wanted to.
Funded or insured STD plans and nearly all long-term disability (LTD) plans will generally be subject to the new disability claims procedures. An insurance carrier is liable for following ERISA’s claims procedures, but an employer will want some sort of contractual protection that the insurer will follow applicable law, including ERISA.
Active Employee Group Health Plans
Many of these plans do not make disability determinations impacting benefits meaning the new rules will not apply to them. The COBRA disability extension is based upon a separate determination by the Social Security Administration and not the plan itself. Similarly, while the plan probably permits participants to continue coverage while on paid disability leave, the determination of whether someone is disabled is outsourced to a disability plan or other entity (e.g. a state agency). If a group health plan does make its own disability determinations, for whatever reason, the new rules likely apply.
Retiree Group Health Plans
A retiree group health plan’s eligibility rules may include provisions for former employees who are disabled. Retiree plans frequently state that an individual will be deemed disabled only if he or she has received a disability determination under a separate LTD plan and/or the Social Security Administration meaning the retiree group health plan does not make the determination itself and the new rules will not apply. If a retiree group health plan does make its own disability determinations, for whatever reason, the new rules likely apply.
Other Welfare Benefits
Other welfare benefits subject to ERISA that make disability benefit determinations such as service credits, specific benefits, and/or premium waivers will be subject to the new rules. Many of these will be fully-insured, and our earlier comment about insurance carriers applies here as well.
A number of ancillary benefits may qualify for ERISA’s “voluntary plan” exception under ERISA Reg. § 2510.3-1(j) exempting them from ERISA’s claims procedures. The “voluntary plan” exception generally covers voluntary insurance products sold directly to employees that meet certain criteria and are not considered plans sponsored by the employer. State law will determine the applicable claims processes in those instances, and the employer will not be involved.
Welfare “Wrap” Plan Materials
If an employer uses a welfare “wrap” plan document or other wrap material for the purposes of satisfying ERISA requirements and these materials include claims procedures for disability benefits, they should be updated to reflect the new rules unless one of the exceptions mentioned earlier applies for all of the incorporated disability benefits. An employer may still choose to voluntarily comply if an exception applies.
Many retirement plans (e.g. pension plans, 401(k), etc.) have eligibility, service credit, and/or other provisions related to or affected by disability determinations. It is common for retirement plans to state that an individual will be deemed disabled only if he or she has received a disability determination under a separate LTD plan and/or the Social Security Administration meaning the retirement plan does not make the disability determination itself. If a retirement plan does make its own disability determinations, the new rules likely apply.
Sponsors of a retirement plan using a disability definition based on a determination made under a separate LTD plan should be mindful when switching insurance carriers to ensure that the change does not result in a prohibited cutback for one or more participants under the retirement plan as a result of the new insurance carrier’s disability criteria. A similar issue might occur if the change in insurance carrier somehow affects benefit accruals resulting in an ERISA § 204(h) notice event. Both outcomes may be rare.
Non-Qualified Deferred Compensation Plans
A number of non-qualified deferred compensation plans will qualify as “top hat” plans under ERISA Reg. § 2520.104-23. Top hat plans do not have to comply with certain ERISA requirements, such as the summary plan description rules, but they are subject to ERISA’s claims procedures. If the top hat plan makes any disability determinations, it is subject to the new disability claims procedures.
Administratively, the new disability claims procedures go into effect on January 1, 2018. Any necessary changes to plan documents should occur by the end of the plan year in which the change occurs. ERISA requires summary plan descriptions to include a description of the plan’s claims procedures. Conservatively viewing the changes as material modifications, the corresponding summary plan description changes must be made within 210 days after the end of the plan year in which the material modification occurred. This means the amendments to summary plan descriptions for calendar year plans are due by the end of July 2019. Employers may choose to act faster for a variety of reasons.