Employers: Prepare to Address Disability Claims Under all Types of Benefit Plans Differently, Effective April 1, 2018

March 22, 2018
Legal update

Beginning April 1, 2018, employers will need to be prepared to address Department of Labor (DOL) final regulations expanding the requirements for claims based on a “disability” under a wide variety of benefit plans. Any ERISA-covered benefit plan that provides a different right to participants who meet a definition of disability—for example, faster vesting, sharing in a year-end retirement allocation despite low active work hours, or receipt of disability income-replacement benefits—will be impacted by these new rules. Plan sponsors will need to review their plan documents and summary plan descriptions (SPDs) to modify written claims procedures, and, most important, must be ready to address disability decisions in operation in compliance with the new rules very quickly.

If disability decisions made on or after April 1, 2018, do not comply with the new disability claims procedures, and the claim is later litigated, a court will review the issues “de novo” and give no deference to an administrative determination, nor limit review to the facts and documents that were assembled as the administrative record.

Here is a brief overview of the changes:

Employer Action Steps:

1. Identify Plans with Disability Triggers. Employers must first determine which plans they maintain that include rights that vary if a participant is disabled. This list generally will include more than just the obvious long-term disability income program. For example:

• A short-term disability plan may need to comply, if it is more than a “payroll practice” and thus not exempt from ERISA.

• A 401(k) Plan may include an employer contribution that becomes 100 percent vested if a participant becomes disabled while employed by the plan sponsor.

• A profit sharing plan might condition receipt of a share of a contribution on a participant remaining employed until year end, or working up to 1,000 hours in a year, and those terms often make exceptions if the person failed to meet the standard as a result of becoming disabled.

• Occasionally, a retirement plan might allow a distribution upon the occurrence of a disability, even before the disability has resulted in a termination of the employment relationship.

• A life insurance program might waive further payment of premiums for any period while the participant is disabled.

• A pension plan might allow retirement income to begin earlier, sometimes at the same level of income as if the participant were retirement age, if a participant becomes disabled. Or, a pension might continue to count a period when someone is receiving a long-term disability income benefit as service for purposes of calculating the participant’s benefit.

• Nonqualified deferred compensation or supplemental retirement plans (sometimes referred to as “top hat” plans), which have different benefits, payment terms or entitlements based on disability.

2. Who Decides? Does a third party (external) reviewer determine if disability exists? If so, either the plan document, insurance contract or service agreement (as applicable) needs to require that that third party comply with the new DOL rules. 

3. Update Documents. Many benefit plans detail claims procedures only in the SPD; in that case, the plan document might not need to be updated, but a summary of material modifications should be provided to plan participants outlining the disability claims procedure changes. Fast action is needed for a plan that is primarily focused on providing disability income, but most employers will find they rely on an insurance carrier or third-party administrator to make the needed operational and document changes on these plans.

The less obvious application of these rules to other types of benefits programs—like retirement plans—will place a higher burden on employers for analysis and action before the first disability claim is received after April 1, 2018. Employers should note that retirement plan platform providers seldom make claims decisions, but rather rely on the employer to direct if a participant meets a plan requirement. Further, most pre-approved retirement plan documents do not include a claims procedure (referring instead to a SPD) and the document provider generally only provides a sample SPD for which updates are not routinely offered. We expect that many retirement plan sponsors will prefer to minimize or eliminate their involvement in disability decisions in the wake of the new rules. This alone may require a plan amendment and perhaps changes in service agreements.

If you have any specific questions on if and how the new disability claim and appeal rules affect your benefit plans, please contact Carl Lammers or any other attorney in Frost Brown Todd's Employee Benefits Group.

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