New Department of Labor Disability Claim Procedure: A Trap for the Unwary

Daniel L. Morgan

On April 1, 2018, a new Department of Labor regulation that modifies the procedures ERISA-governed plans must use to evaluate disability claims took effect.

According to a Department of Labor news release, the modified procedures:

give America’s workers new procedural protections when dealing with plan fiduciaries and insurance providers who deny their claims for disability benefits … and ensures, for example, that disability claimants receive a clear explanation of why their claim was denied as well as their rights to appeal a denial of a benefit claim, and to review and respond to new information developed by the plan during the course of an appeal. The rule also requires that a claims adjudicator could not be hired, promoted, terminated, or compensated based on the likelihood of denying claims.”

Why It Matters

Failure to modify the claims procedures of a benefit plan that is covered by the new rule undermines the ability of the plan to obtain deference in litigation to an administrative determination as to whether a plan participant is disabled for purposes of the plan.

What Types of Employee Benefit Plans Are Impacted?

An employee benefit plan that provides long-term disability benefits will need to comply with the new rule. Whether a short-term disability benefit plan is impacted by the new rule depends on whether the plan is subject to ERISA or is exempt under a Department of Labor exception for so-called “payroll practices,” under which the benefits are paid from the employer’s general assets.

The new regulation might also have applicability to employee benefit plans including, for example, 401(k) plans that provide accelerated vesting to participants who are disabled and pension and nonqualified deferred compensation plans that provide for different or enhanced benefits to participants who are disabled.

What Employers Need to Do

Employers need to check which of their benefit plans that are subject to ERISA grant the plan’s administrator the authority to determine whether a plan participant is disabled. Once the impacted plans have been identified, the employer should coordinate with the insurance company, third party administrator, or other service provider to confirm that changes to plan documents and summary plan descriptions, and notifications to participants covered by the plans, are being made to comply with the new rules.

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