Before discussing how plan sponsors should respond to this latest guidance, it is important to understand why claims procedures are important. ERISA plans are required to maintain an internal review and appeals procedure for the settlement of claims for benefits. If a plan contains these procedures, courts typically will be deferential to the determination made by the plan administrator and also will limit discovery to the record that was developed during the internal claims review and appeal. If a plan does not comply with these claims procedures, courts may expand discovery and also review a claim decision without providing any deference to the administrator’s determination.
Now back to the new disability claims regulations—the scope of these new disability claims regulations is broader than many people may realize. It makes sense that the rules apply to ERISA-governed health and welfare plans (e.g., short- and long-term disability plans) where disability claims are prevalent, although it is important to note that, with insured health and welfare plans, the burden falls primarily on the insurer—not the plan sponsor—to comply with these new requirements. In those cases, employers need only take steps to ensure that their insurers (and insurance policies) are updated for compliance. On the other hand, if an employer has a self-insured health and welfare plan that requires disability determinations, that employer will face the full burden of complying with these new rules (assuming the regulations are not altered or repealed).
While the extension of these rules to health and welfare plans is commonsense, it is less intuitive that these rules also apply to ERISA-governed retirement plans that make disability determinations. And, within the retirement plan universe, these rules apply to both qualified and nonqualified retirement plans. While nonqualified retirement plans are exempt from many ERISA requirements, the claims procedures requirement is not one of them. Accordingly, qualified and nonqualified retirement plans that are subject to ERISA and meet both of the following requirements are subject to these new disability claims procedure regulations: those that (1) provide benefits conditioned upon a finding of disability (e.g., to determine eligibility for a disability benefit) and (2) require the employer to make the disability determination.
There is a notable and expansive exception to these new rules. These new disability claims procedure regulations do not apply to any plan (health and welfare plan or qualified/nonqualified retirement plan) that provides a benefit the availability of which is conditioned on a finding of disability made by a party other than the plan itself. For example, if a long-term disability plan provided benefits to those who are considered disabled by the Social Security Administration, these rules would not apply because it would be the Social Security Administration—and not the plan itself—that is making the disability determination. Similarly, if disability benefits under an ERISA-governed retirement plan are conditioned upon eligibility for disability benefits under the employer’s long-term disability plan, these rules would not apply because it would be the long-term disability plan—and not the retirement plan itself—making the disability determination.
With the most recent announcement, plan sponsors now have to decide between the following choices:
- Review ERISA-governed health and welfare and retirement plans and determine whether to comply with the increased procedure requirements, or amend their definition of disability to fit within the exemption described above.
- Wait and see if the DOL issues any new guidance or further delays the effective date of these requirements before amending any plans and altering claims and appeals procedures.
The decision to wait is somewhat risky because it is still unclear whether the DOL will retain the current requirements and the Jan. 1, 2018 effective date, amend the rule, or repeal the regulation entirely. For some employers, it may be worthwhile from a practical standpoint to amend their definitions of disability to eliminate any subjective discretion on their part to determine whether employees have become disabled. If a plan has not been reviewed or amended in a few years, it could also be a good opportunity to review the plan and make sure that it is consistent with administration (something that sounds simple, but tends to be a surprisingly large source of problems). We will continue to monitor the situation.