New Disability Claims Procedures Affect Retirement Plans and Deferred Compensation Plans Too
Much has been written about the Department of Labor's final rule regarding disability benefit claims procedures (the "Final Rule"), which took effect on April 2, 2018. And by now, most employers – and all disability insurance carriers – have taken steps to implement changes in disability plan administrative procedures and plan documents necessary to comply with the Final Rule. However, many employers have been somewhat slower to react to the implications of the Final Rule for their retirement plans and deferred compensation plans that include a benefit or payment based on disability. Plan sponsors generally have until December 31, 2018 (for calendar year plans) to adopt amendments that would be retroactively effective to April 2, 2018. Plan sponsors should take the time now to determine whether their retirement plans and deferred compensation plans may be affected by the Final Rule.
Summary of Key Requirements
The Final Rule is designed to harmonize the rules that apply to the processing of disability claims under ERISA with the claims administration requirements of the Patient Protection and Affordable Care Act. In order to accomplish this, the Final Rule prescribes a number of new requirements for determinations of disability under an ERISA plan. These new requirements include the following:
- mandatory independent claims review;
- an additional opportunity for claimants to review and respond to new information or rationales applied by a claims administrator to deny a claim;
- new content requirements for benefit denial notices;
- treatment of certain rescissions of coverage as denials of benefits that may trigger the appeal process; and
- the provision of English language assistance where necessary.
If a covered plan fails to follow these new procedures, a participant whose disability-related claim has been denied will generally be deemed to have exhausted her administrative remedies and may immediately file a lawsuit to recover benefits.
It goes without saying that short-term and long-term disability plans subject to ERISA must comply with these new rules because all claims for benefits under such plans turn on a determination of a participant's disability. However, the Final Rule also applies to 401(k) plans, 403(b) plans, and other retirement plans, as well as many deferred compensation plans.
How the Final Rule Applies to Retirement Plans and Deferred Compensation Plans
One of the policy goals of the Final Rule is to ensure that all plans subject to ERISA make determinations of disability either (1) by applying objective criteria that do not require the exercise of discretion by the plan sponsor or plan administrator or (2) in compliance with the rigorous procedural requirements of the Final Rule if discretion must be exercised. Accordingly, a retirement plan that includes disability-related vesting, benefit calculation, or benefit payment terms must comply with the Final Rule either by eliminating administrative discretion in disability determinations or by following the new claims procedures.
A retirement plan that determines a participant's "disability" by requiring that the participant be entitled to benefits under the employer's long term disability plan or qualify for Social Security disability benefits does not have to be amended to comply with the Final Rule. Under such a plan, the retirement plan administrator exercises no discretion in determining the disability status of the participant. However, a retirement plan under which the plan sponsor or plan administrator must itself determine a participant's disability either will have to adopt a new definition of disability that eliminates all discretion or adjust its claims procedures to comply with the Final Rule. This is true even if the plan refers to seemingly objective disability standards but requires the retirement plan administrator to make the determination whether a participant is disabled in accordance with the standards.
In addition, the Department of Labor has confirmed that the Final Rule applies to deferred compensation plans – even a plan that is considered a "top hat" plan. Therefore, plan sponsors should review their deferred compensation plans applying the foregoing principles in order to determine whether those plans must be amended in order to comply with the Final Rule. (Certain deferred compensation plans known as "excess plans" are fully exempt from the Final Rule.) Note that a definition of disability that follows the safe harbor language provided in the regulations under Code Section 409A typically still requires an exercise of discretion by the plan administrator and is not sufficient to avoid adoption of the disability claims procedures under the Final Rule.
Two Ways to Comply
For retirement plans and deferred compensation plans whose definition of "disability" gives the plan administrator discretion to make the disability determination, there are two ways to comply with the Final Rule. First, the plan's definition of "disability" may be amended to require determinations of disability to be made by reference to an impartial objective standard (under which the plan administrator cannot exercise any discretion). Under this approach, the definition of "disability" could be amended to provide that a participant is disabled only if she has been determined to be disabled under the plan sponsor's long-term disability plan or by the Social Security Administration. Alternatively, the plan's definition of disability could remain as is, provided the plan is amended to incorporate the disability claims procedures prescribed by the Final Rule.