The Department of Labor has announced a delay, until April 1, 2018, for revised regulations changing the claims procedures governing disability benefits. These regulations have caused some confusion, as employers try to understand the impact of these rules. This note will try to shed some light on the issue.
The delay does not mean the regulations will actually go into effect in April. Rather, the DOL will use this period to accept new comments about the “potential impacts” of the regulations. More specifically, the DOL will consider the new comments “as part of its effort to examine regulatory alternatives that meet its objectives of ensuring the full and fair review of disability benefit claims while not imposing unnecessary costs and adverse consequences.”
This reference to “unnecessary costs and adverse consequences” may set the stage for further delay, revision or total withdrawal of these rules. Stay tuned.
In the meantime, the rest of this blog will discuss how (little) employers really need to do to prepare for these rules, in case the DOL does actually go forward with that April 1 date.
Disability: A Hybrid Benefit
Disability benefits are somewhat of a hybrid. Disability insurance payments are made based on physical and mental conditions that prevent an individual from engaging in gainful employment. In that regard, disability claims require an assessment of an individual’s physical or mental condition. So, a claim for disability benefits is, in effect, a medical claim.
However, disability benefits provide income replacement – LTD payments are paid as an income replacement benefit. So, retirement plans commonly have provisions focused on participants who incur a disability. For example, many traditional defined benefit pension plans pay an additional annuity amount to individuals who became disabled. And 401(k) plans typically grant additional rights (to existing balances) upon a disability – such as full vesting or access to distributions.
The Revised Regulations
DOL regulations have long provided certain procedural safeguards for individuals who have a claim for disability denied and who seek to appeal that denial. The DOL’s new regulations revise those longstanding rules to add more safeguards for claimants. These safeguards mirror rules under the Affordable Care Act regarding appeals of denials of medical claims. Overall, the new regulations increase notice and disclosure requirements, prescribe more rigorous standards for review of denied claims, and provide claimants’ greater access to information in the claims process. For example, the revised regulations require plans to provide information about medical protocols or standards used in denying claims;
(Here is a DOL fact sheet on the new regulations.)
Impact on Employers: LTD and STD Plans
The revised regulations will have the greatest impact on disability carriers (both long-term disability and short-term disability carriers are affected). After all, it is the carriers that administer claims appeals. The revised regulations will require these carriers to modify both their claims appeals procedures and employee communication material regarding those procedures. So, employers should be aware of these impending carrier changes – unless, of course, your carrier has (in anticipation of the finalization of the regulations) already adopted the necessary changes.
By way of contrast, STD plans funded from the employer’s general assets are not impacted by these new regulations. These self-funded STD programs are treated, under ERISA, as an employer “payroll practice” and exempt from ERISA requirements (including ERISA claims appeals procedures).
Impact on Employers: 401(k) Plans
As noted, 401(k) plans typically provide additional rights (to existing balances) for participants who incur a disability – such as vesting or distribution rights. However, in order to determine if a participant is entitled to vesting or distribution due to disability, the 401(k) plan must determine whether a participant is disabled – using whatever standard of disability is used in the 401(k) plan document. (The two most common definitions used are disability as determined by the Social Security Administration (SSA) or under the employer’s LTD policy.) However, the fact that a 401(K) plan provides any additional rights upon disability means that the plan is now impacted by these DOL rules.
Admittedly, the process for reviewing denials of disability claims is more complicated under the revised regulations. But, as noted above, 401(K) plans generally do not make an independent determination of disability. Rather, they rely on the determination made by other sources, such as the Social Security Administration or the employer’s LTD carrier. So, 401(K) plans will be spared from the most significant components of the revised regulations. Here is what 401(K) plans can expect and why:
- 401(k) plans should update internal procedures for handling an appeal from a denial of disability benefits to comply with the new regulations. That means if a claim for disability benefits is denied, the plan administrator should be prepared to:
- Provide claimants with more information on the basis for the denial;
- Provide claimants with any additional information received between the initial denial and the decision on appeal;
- Provide claimants with notices in “an applicable non-English language” if ten percent or more of the population residing in the county is literate only in that non-English language.
Although updating appeals procedures sounds complicated, it is important to remember that since 401(k) plans typically “piggyback” off of disability determinations made by another entity (such as SSA or the employer’s LTD carrier), the claims procedures actually utilized by 401(k) plans are far less complicated than the claims procedure used for the actual determination of disability. For example, if a 401(k) plan uses the determination made under the employer’s LTD plan, it would be reasonable for the 401(k) plan administrator to obtain the procedures used by that LTD carrier and use them as the template for the 401(k) plan’s procedures.
- 401(k) plans will also need to update SPDs’ description of the appeals procedure governing disability claims (either with an updated SPD or a summary of material modifications (SMM)). Generally, these updates are not due until not later than 210 days after the close of the plan year in which the change is adopted – so July 29, 2019 for calendar-year plans.
Noteworthy-But Not Necessarily Significant
LTD/STD programs and 401(k) plans that offer additional rights upon disability are affected by these revised regulations and will need to come into compliance by April 1, 2018 – if the regulations actually become effective on that date. And that is a big if. Moreover, given the limited role of employers in reviewing appeals of disability denials, compliance should (ultimately) be manageable.