Understanding Employee Benefits and key developments in the employee benefits field and items of interest to our clients. MORE

One of the clear trends in employee benefits involves companies offering assistance with their workforce’s student loan repayments. The reasons are obvious. Student loan debt is now the largest source of consumer debt after housing and that will likely be the case for the foreseeable future. This financial insecurity has a clear link to workplace productivity. In addition, companies are using student debt repayment incentives as recruitment tools for millennial workers. However, because these benefits were historically not offered on a tax-favored basis, the appeal was limited.

The IRS in a recent private letter ruling opened the door to a potential new incentive – the ability to offer a 401(k) “match” tied to an employee’s student loan repayments. Private letter rulings are not binding on anyone but the taxpayer seeking the ruling, so the private letter ruling cannot be relied on by other taxpayers looking to offer a similar program. This is especially true for this particular ruling given how narrow the scope of the ruling is and the number of outstanding questions it raises. Nonetheless, the private letter ruling has generated a lot of discussion on retirement plan design.

The private letter ruling was requested by an employer that maintains a traditional 401(k) plan with a regular matching contribution equal to 5% of the participant’s compensation per pay period if the participant made an elective contribution to the 401(k) plan of at least 2% of his or her compensation. The employer desired to amend its plan to add a new student loan repayment benefit program (the “Program”). The key terms of the Program are as follows:

— The employer would make a non-elective contribution on behalf of participants in the Program who made student loan repayments. If a participant made a student loan repayment of 2% of compensation, then the employer would make a non-elective contribution to the 401(k) plan equal to 5% of the employee’s compensation.

— Participants in the Program would not be eligible to receive the regular matching contribution for any elective deferrals to the 401(k) plan while participating in the Program.

— The employer would also have a “true-up” matching contribution at the end of the year if the participant did not make a student loan repayment during a pay period but did make elective contributions to the 401(k) plan.

— The non-elective contribution and “true-up” matching contribution would be subject to the same vesting schedule as the regular matching contribution.

The employer requested a ruling that the Program would not violate the “contingent benefit” rule under Code Section 401(k)(4)(A). The contingent benefit rule prohibits a 401(k) plan from conditioning any benefits (other than matching contributions) on the participant making an elective contribution. The IRS granted the ruling agreeing that the Program would not violate the contingent benefit rule because the Program was conditioned on the participant making a student loan repayment, not an elective contribution.

While this ruling is welcome for employers seeking creative 401(k) plan designs, it leaves open a number of practical questions an employer will need to consider before implementing a similar student loan repayment program. Some of the issues to consider are:

— How will coverage and nondiscrimination testing apply to such programs? Depending on the industry, the employees who would likely participate in a student loan repayment program include a mix of both highly compensated employees and non-highly compensated employees.

— Is such a program available to a safe harbor 401(k) plan?

— How would the employer substantiate that the student loan repayments were made? The easiest mechanism to substantiate would be if the employer directly paid the student loan provider through a payroll system, but this approach can be burdensome operationally.

Given these outstanding issues, companies that are interested in offering a similar program should work closely with benefits counsel to make sure the program is right for the company and administratively feasible. Tom Dowling and Mark Wilkins have been working closely with clients on possible solutions.  To discuss potential options, please contact Tom or Mark or the employee benefits attorney with whom you normally work.

On August 31, 2018, President Trump signed an executive order outlining the administration’s priorities for American retirement plans. Emphasizing that as many as 34 percent of workers do not have access to a workplace retirement plan, the order outlines the administration’s plan for increasing workplace retirement plan availability.

The first section of the order outlines policy points, noting that employers with more than 500 employees are more likely to offer retirement plans than are employers with fewer than 100 employees. The current “[r]egulatory burdens and complexity” of offering a retirement plan may be cost prohibitive for small employers who might otherwise offer retirement benefits. The order calls on federal agencies to “revise or eliminate” rules that impose “unnecessary costs and burdens” which may be preventing small businesses from establishing retirement plans. The administration’s goal of increasing access to multiple employer plans (MEPs), which would allow small employers to band together to participate in a single retirement plan, echoes the recent expansion of access to association health plans. The order also prioritizes both the reduction/simplification of employee benefit plan notice requirements and the revamping of current required minimum distribution rules to prevent retirees from running out of money during their later retirement years.

The second section of the order directs the Secretaries of Labor and Treasury to “examine policies” to increase access to MEPs. Within 180 days of the signing of the order, the Secretary of Labor is to consider whether a notice of proposed rulemaking, other guidance, or both should be issued regarding what groups or employer associations may be an ERISA section 3(5) “employer.” The Secretary of Treasury is specifically directed to consider providing guidance to MEPs navigating the tax qualification process. The second section of the order also directs the Secretaries to overhaul current retirement plan disclosure notices within the next year. The goal is to make notices both user-friendly for participants and less burdensome for employers and other plan fiduciaries to produce. Lastly, the Secretary of Treasury is also directed to review within 180 days the life expectancy and distribution period tables applicable to required minimum distributions to determine whether updates are needed.

While the order does not immediately affect workplace retirement plans, the order provides valuable insight on the administration’s workplace retirement policy. If you have questions about how this may affect your business, or if you are considering implementing a qualified retirement plan, please contact us or the Stinson Leonard Street attorney with whom you regularly work.

As mentioned in a previous blog, the IRS has issued its initial guidance on Code Section 162(m), as modified by the Tax Cuts and Jobs Act.  One important aspect of the guidance is its discussion of preserving deductibility under the transition rule, also known as the 162(m) “grandfather” rule. Under the grandfather rule, compensation paid pursuant to a written binding contract that is in effect on November 2, 2017 and has not been materially modified is deductible to the extent it would have been under the old Section 162(m) rules.

Significant focus has been placed on how the grandfather rule applies to performance-based compensation. However, employers should also review non-performance-based compensation arrangements that have historically relied on the deferred amounts being paid after the covered employee’s termination of employment for exemption from Section 162(m)’s deduction limit. Except for amounts qualifying under the grandfather rule, this exemption for amounts deferred until after termination of employment is no longer available under the new “once a covered employee, always a covered employee” rule of new Section 162(m).

Exactly how the grandfather rule will apply to deferred compensation is not entirely clear. For example, a provision in a deferred compensation arrangement that allows an employer to change or freeze earnings or investment credits on a deferred compensation account may mean that earnings after November 2, 2017, will not be grandfathered, depending on whether there are legal limitations on how that right could be exercised.  However, it is clear that knowing an employee’s nonqualified deferred compensation account balance or accrued benefit on November 2, 2017, is critical, as may be the ability to track earnings on that account balance through the date of payment.

All employers, whether or not currently subject to Section 162(m), should consider gathering, and making arrangements to track and retain, this information for all employees participating in nonqualified deferred compensation plans, whether or not they are currently covered employees. Because of the potentially lengthy period of deferral (until termination of employment), it is possible that, at the time of payment, Section 162(m) will apply to the employer and the employee will be a covered employee.

Employers with questions about Section 162(m) or the new guidance can contact the author or the Stinson Leonard Street contact with whom they regularly work.

On August 21, 2018, the IRS issued its initial guidance on the amendments to Section 162(m) made by the Tax Cuts and Jobs Act, in the form of Notice 2018-68.  The guidance is fairly limited and does not completely address some of the questions it takes on. Notably, the guidance on what compensation will not be subject to the amended Section 162(m) under the grandfather rule may be very restrictive with respect to performance-based compensation that is subject to negative discretion, depending on the extent to which that discretion may be exercised under applicable law.

As a reminder, Section 162(m) limits the deduction for compensation paid to certain employees of companies with publicly traded equity or debt (“covered employees”) to $1 million per year.  Among other things, the amendments to Section 162(m) eliminated the exception from that limitation for performance-based compensation and redefined covered employees so that once an employee becomes a covered employee, he or she remains one, even after termination of employment.  Similar to Section 162(m) as originally enacted, the amendments provide for grandfathering of compensation paid pursuant to a “written binding contract” in effect on November 2, 2017 that is not modified in any material respect.  The key areas addressed by the guidance are how covered employees are identified and what compensation will be eligible for grandfathering.

The Notice is quite clear with respect to identifying covered employees. Identification of covered employees is now divorced from the SEC compensation reporting requirements, except that the amount of compensation used in identifying covered employees is determined in the same way as for SEC reporting purposes.  Under the new rules, covered employees for a year include anyone who was a principal executive officer (PEO) or chief financial officer (CFO) at any time during the year and the three other executive officers who had the highest compensation, regardless of whether they were employed on the last day of the year or whether their compensation was required to be reported.  In addition, any covered employees from previous years, beginning in 2017, would also be covered employees. For purposes of determining those prior year covered employees for 2017, the Notice helpfully clarifies that the rules in effect prior to the 162(m) amendments apply.  The Notice also addresses identification of covered employees when a public company has a short tax year differing from its fiscal year due to a transaction.

The guidance on grandfathered compensation is not as clear, perhaps because identifying compensation a company might be required to pay an executive under a contract is a matter of contract law. For instance, the examples provided make it clear that compensation will not be considered paid pursuant to a written binding contract to the extent the company could have lawfully exercised its discretion to pay less. In Example 3 of Section III.B. of the Notice, the arrangement, which would qualify as performance-based under Section 162(m), provided that if a specific performance goal were met, the company could pay out as much as $1.5 million, but could use its discretion, based on subjective factors, to pay out as little as $400,000 to a covered employee.  The company paid out $500,000, and the IRS concluded that only $400,000 would be considered grandfathered.  It is important to note that it is not completely clear that the absence of a minimum payment amount would mean that no compensation would be considered payable pursuant to a written binding contract; that is a matter of applicable law (e.g., state contract law).  Example 3 states as a fact that the employer had the ability under applicable law to exercise discretion to pay out as little as $400,000.  This leaves open the possibility that, under applicable law, even with discretion in the written compensation agreement to pay nothing when performance goals are met, the employer might be required to exercise available discretion under the contract pursuant to a duty of good faith and fair dealing, which might mean that some amount would be considered to be payable pursuant to a written binding contract. The Notice applies the same analysis to whether earnings on a deferred payment would be grandfathered:  the lawful exercise of discretion to eliminate earnings credits would take the earnings out of grandfathered status.  Although many deferred compensation contracts include such discretion, there may be other provisions in the arrangement that could be read to override certain exercises of such discretion, or applicable law might require the exercise of discretion be in good faith.

One troubling part of the Notice’s discussion of grandfathering concerns material modifications, which can eliminate grandfathered status for compensation. The Notice, similar to the guidance provided for Section 162(m) as initially enacted, provides that a material modification is one that increases the compensation payable under an otherwise grandfathered agreement, and indicates that acceleration or delay of payment, so long as the payment is appropriated reduced if accelerated and is not increased beyond a stated interest rate, fixed index or similar objective investment rate of return, will not be a material modification.  However, the examples do not clearly address compensation paid pursuant to an existing written binding contract that is deferred past termination of employment, where the contract is later materially modified.  Example 2 of Section III.B. of the Notice allows deferred compensation that is otherwise grandfathered (a bonus earned in 2016), to be paid in 2020 without being subject to the deduction limits of amended Section 162(m).  However, in Example 10 of Section III.B., an amendment to an otherwise grandfathered employment agreement that provides for a large increase in compensation (a material modification) causes any payments made pursuant to that contract after the amendment to be subject to the new Section 162(m) rules.  This Example should be clarified to address that amounts paid pursuant to the terms of the contract prior to the amendment but paid after the amendment (whether deferred or simply paid after the amendment under normal practices) can retain grandfathered status.

Treasury and the IRS acknowledged the limited nature of the guidance provided and requested comments on additional issues to be addressed by guidance. Treasury and the IRS anticipate that the guidance in the Notice will incorporated into proposed regulations, which will provide additional guidance.

Employers with questions about Section 162(m) as amended or the new guidance can contact the author or the Stinson Leonard Street contact with whom they regularly work.

On June 19, 2018, the Department of Labor (DOL) released a final rule that offers new options for associations to sponsor health plans for their members.   These new options allow more small businesses to come together to create large employer plans free from many of the Affordable Care Act (ACA) mandates applicable to individual and small group insurance plans.  The DOL expects that this will drive down cost for these businesses and increase opportunities to design plans that better fit the needs of the member businesses.

Original guidance under the ACA required insurers to look through association health plans to determine if any participants were small employers or individuals.   If there were any small employers or individuals in the plan, the plan would have to comply with the ACA mandates applicable to small group and individual insurance plans.   This meant that associations could not offer small employer or individual members different coverage options or pricing than was already available to them in the small group or individual markets in their area.   Some existing association health plans were not subject to these look-through rules.

The new rule clarifies the position of the DOL that the look-through rules do not apply to qualifying association health plans. It also creates new options for associations of businesses to sponsor a health plan that is treated as a large group plan exempt from the ACA small group and individual insurance mandates.

The final rule broadens the definition of “employer” under ERISA to include associations with a broader commonality of interest. An association can still satisfy the commonality test if its members are in the same trade, industry, line of business, or profession. The rule intends these terms to be construed broadly. The association can further segment health plans within the industry based on other areas of commonality, meaning an association could offer different plans to corn growers than it does to dairy farmers, as long as such segmentation is not directed at individual participants or beneficiaries based on health factors.   The final rule also recognizes commonality of interest by region.  Commonality can be established based on a state or a metro area even if it extends over state lines.   An association health plan is not required to cover an entire state or metro area.

Another significant change is that the new rule will allow an association’s primary purpose to be the provision of a benefit plan, as long as the association has at least one other substantial purpose that is not related to the provision of benefits. If the association existed prior to the rule, it is presumed that another substantial purpose exists. However, the association health plan cannot be controlled by a health insurance issuer, and must be controlled by the employee-members of the association. It is presumed that the employee-members control the plan if they have the power to elect and remove directors of the association, and authority and opportunity to approve or veto activities relating to formation, amendment, design, and termination of the plan.

The new rule will permit working owners including sole proprietors to participate in the association health plan even if they don’t have any other employees working in their business. This permits working owners who are not otherwise treated as employees of the business and who do not have other employees working for them to be included in the association health plan, as long as they meet requirements for how much they work for the business.

Association health plans using the new guidance are not permitted to separately experience-rate employer members but must treat all businesses within a particular category the same regardless of the health factors of their employees or their claims experience. Separate groups can be created and separately rated, provided that the different classifications are legitimate and not based on health factors.

The new rule does not supplant existing guidance, so association health plans that existed prior to the rule will not be required to comply with the new rule unless they choose to expand the membership of the plan as permitted under the new rule. Additionally, association health plans can choose between satisfying the new rule or following the old requirements. The old requirements are more restrictive with respect to qualifying as a bona fide association, but more flexible on permitting experience rating for employer groups within the plan.

Importantly, the rule does not change or limit existing state authority to regulate association health plans. Just as before the new rule, insurance issued to fully-insured association health plans is regulated by state law. States can also regulate self-funded association health plans to the extent the state regulation is not inconsistent with ERISA.   These state laws are not preempted by ERISA.   This means that associations will need to evaluate their options on a state-by-state basis.  There is considerable variation in state law regarding requirements for association health plans.  For example, some state laws impose look-through requirements that would limit exemptions for association health plans from state small group requirements.   Other states permit insurers to treat qualifying association plans as large group plans not subject to small group requirements.  Some states permit working owners without other employees to participate in association health plans while others do not.  In addition, states have varying requirements for self-funded association health plans.  Some states permit self-funded association health plans as long as they comply with certain state law requirements to ensure the financial stability of the plan.  Other states prohibit self-funded association health plans altogether. Some states that wish to permit the new flexibility for association health plans provided by the new rule may look to amend their state laws to do so.

The changes will take effect in three phases beginning September 1, 2018, for fully-insured association plans, January 1, 2019, for existing self-funded association plans, and April 1, 2019, for new self-funded association plans.

The new rule faces opposition from groups that are concerned that expansion of association health plans for small employers and working owners will shrink consumer protections, drive up costs in the small group and individual insurance markets, and invite fraud and mismanagement in association health plans.   On June 21, 2018, the attorneys general of New York and Massachusetts indicated that they would sue the administration to attempt to block the new rule.

For more information about the new rule and how it may affect your business, please contact Jeff Cairns, Tom Dowling, Todd Martin or the Stinson Leonard Street contact with whom you regularly work.

On April 23, 2018, the DOL released Field Assistance Bulletin (FAB) 2018-01 relating to (1) plan investment in “economically targeted investments (“ETIs”), (2) the exercise of shareholder rights and (3) investment policy statements. We will address the first of these topics in today’s post. Generally, ETIs are investments that promote certain environmental, social and governance goals in addition to general investment benefits.

Background: Policy Tug-of-War

FAB 2018-01 is the most recent episode in a decades-long policy debate about how fiduciaries charged with investing ERISA plan assets should weigh the collateral economic or social benefits offered by certain investments. Plan fiduciaries have long struggled with implementing vague guidance on how to satisfy ERISA’s strict standards for investment of assets on the plan level while also doing what the fiduciary perceives as “the right thing” on a societal level.

The Clinton administration issued Interpretive Bulletin (IB) 94-01, which (according to IB 2015-01) was issued to “correct a popular misperception at the time that investments in ETIs are incompatible with ERISA’s fiduciary obligations.” IB 94-01 explained what some have called the “all things being equal” test, under which ERISA permits plan fiduciaries to invest in an ETI if the ETI has a risk/return profile similar to a non-ETI option that would be appropriate given the diversification and investment policy of the plan. However, IB 94-01 instructs fiduciaries that “an investment will not be prudent if it would provide a plan with a lower expected rate of return than available alternative investments with commensurate degrees of risk or is riskier than alternative available investments with commensurate rates of return.”

The George W. Bush administration replaced IB-94 with IB 2008-01 in October of 2008, which emphasized “that fiduciary consideration of collateral, non-economic factors in selecting plan investments should be rare and, when considered, should be documented in a manner that demonstrates compliance with ERISA’s rigorous fiduciary standards.” IB 2015-01.

Finding the language of IB 2008-01 unduly discouraged investment in ETIs, the Obama administration released IB 2015-01 (“Interpretive Bulletin Relating to the Fiduciary Standard under ERISA in Considering Economically Targeted Investments”) (29 C.F.R. 2509.2015-1) which withdrew IB 2008-01 and reinstated the language of IB 94-01. The preamble to IB 2015-01 clarified that “plan fiduciaries should appropriately consider factors that potentially influence risk and return” and that ESG (Environmental, Social, and Governance) factors “may have a direct relationship to the economic value of the plan’s investment” and “are not merely collateral considerations or tie-breakers, but rather […] proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices. Similarly, if a fiduciary prudently determines that an investment is appropriate based solely on economic considerations, including those that may derive from environmental, social and governance factors, the fiduciary may make the investment without regard to any collateral benefits the investment may also promote.”

Overview of FAB 2018-01 ETI Guidance: Limiting 2015-01?

FAB 2018-01 provides additional guidance to Employee Benefits Security Administration (EBSA) national and regional offices “to assist in addressing questions” from fiduciaries regarding IB 2015-01. Addressing the language from the preamble to 2015-01 cited and underlined above, FAB 2018-01 seems to hedge the Obama-era statement as a recognition that “there could be instances when otherwise collateral ESG issues present material business risk or opportunities” which “investment professionals would treat as economic considerations under generally accepted investment theories” (and are thus “more than mere tie-breakers”). While acknowledging this possibility, the FAB 2018-01 warns that “[f]iduciaries must not too readily treat ESG factors as economically relevant to the particular investment choices at issue when making a decision.” FAB 2018-01 clarifies that “ERISA fiduciaries must always put first the economic interests of the plan in providing retirement benefits.”

Action Items

While the FAB provides little in the way of practical guidance for fiduciaries, it is significant in that it indicates yet another shift the DOL’s policy. Plan fiduciaries should review whether their plans hold ETIs, and whether they have appropriately weighed any ESG factors as described in FAB 2018-01. Future posts will comment on some of the other topics covered by FAB 2018-01.

 

The IRS announced on April 5th that the agency is seeking input on whether (and how) the individually designed retirement plan determination letter program should be expanded for the 2019 calendar year. Notice 2018-24 requests stakeholder comment regarding additional situations in which sponsors of individually designed plans should have access to favorable determination letter assurance.

Currently, Rev. Proc. 2016-37 allows a plan sponsor to submit an individually designed plan determination letter application in very few circumstances: initial plan qualification, qualification upon plan termination, and upon certain “other circumstances” to be announced annually. No such additional circumstances have been announced for 2018. In deciding which “other circumstances,” if any, would merit a determination letter program expansion, the IRS is considering situations such as significant law changes, new approaches to plan design, and the difficulty (or impossibility) of converting certain individually designed plans to pre-approved plan documents. Pre-approved defined contribution and defined benefit plans sponsored by banks, TPAs, law firms and insurance companies are allowed to file for new approval letters every 6 years.  Currently ESOPs and many cash balance pension plans are unable to adopt pre-approved plans, although the IRS plans to issue opinion letters for these plans as well at some future date.  The availability of IRS processing resources would be a significant factor.

Comments to the IRS should include both the type of plan the commenter would have covered by an expanded program and the specific issues involving that plan design which would justify the expenditure of IRS resources.

Written comments are due to the IRS by June 4, 2018.

As mentioned in our recent blog, the date for complying with the new disability claims procedures (April 2, 2018) is rapidly approaching.  In addition to making sure disability plans comply with the new rules, employers should also be reviewing other ERISA plans, such as qualified retirement plans and nonqualified deferred compensation plans to determine if any changes are required to the plans’ claims procedures.

The need for changes in an ERISA plan, other than a disability plan, arises when, as DOL FAQs state, the plan conditions availability of a benefit on a showing of disability.  However, the special claims procedures are only required if the plan administrator is required to make a determination of disability.  If, instead, the plan follows a determination of disability by a long-term disability insurer or by the Social Security Administration, the special disability claims procedure is not required.

In the qualified retirement plan context, for example, disability may determine eligibility for a benefit under a 401(k) plan that requires a participant to be employed on the last day of the plan year in order to be eligible for a matching or profit sharing contribution, but has an exception for the participant’s termination due to disability.  However, if the plan determined disability based on receiving payments from the long-term disability insurer under the company’s disability plan, no special claims procedure would be required.

A nonqualified retirement plan, although exempt from many ERISA requirements, must have a compliant claims procedure.  If, for example, vesting of benefits and/or payment of benefits is accelerated due to disability, and the employer makes a determination of whether the participant is disabled, changes to the claims procedure will be required.  Note that there may be more than one definition of disability used in the plan, due to specific definitions being required for some purposes under Code Section 409A and the employer retaining other definitions for other purposes, such as vesting.

In addition to disability plans, then, employers should review other plans that are subject to claims procedure requirements under ERISA to determine whether these plans will be subject to the special disability claims procedures.  If the special claims procedures apply, claims procedures that have been provided to participants should be revised.  When a claim arises, the participant should be provided with claims procedures that comply with the special rules and the employer should be prepared to follow them, in order to ensure the participant is required to fully exhaust the plan’s usual claim appeal process before bringing a lawsuit and to have the plan’s decision receive deference in a lawsuit.

29 C.F.R. §2560.503-1

The DOL’s revised ERISA disability claims procedures regulations will be taking effect early next month, and plan sponsors should take a hard look at plan processes over the next few weeks to ensure compliance. The new requirements apply to disability benefit claims filed after April 1, 2018, after a 90-day delay postponed the effective date from January 1, 2018. The revised regulations combine detailed participant notice requirements with a new strict compliance standard for disability benefit claims, increasing both expectations for plan procedures and litigation exposure for plans that don’t meet those expectations.

In the preamble to the final regulations, the DOL hints that the changes were not made to reduce litigation, but to acknowledge that litigation may be a part of the “full and fair review” process. The DOL cites a istudy of ERISA benefits litigation from 2006 through 2010, which concluded that cases involving long-term disability accounted for a whopping 64.5% of litigation, while health care plan litigation during the same period constituted only 14.4%. Later , the DOL states that “[b]ecause the claimant may have limited opportunities to supplement the [litigation] record…it is particularly important that the claimant be given a full opportunity to develop the record that will serve as the basis for the review…[.]” Plan sponsors, then, should ensure their plan’s disability benefits claim procedures will withstand judicial scrutiny.

In the preamble to the regulations, the DOL notes seven major provisions of the final rule:

  1. claims and appeals must be adjudicated in a manner designed to ensure independence and impartiality of the persons involved in making the benefit determination;
  2. benefit denial notices must contain a complete discussion of why the plan denied the claim and the standards applied in reaching the decision, including the basis for disagreeing with the views of health care professionals, vocational professionals, or with disability benefit determinations by the Social Security Administration;
  3. claimants must be given timely notice of their right to access their entire claim file and other relevant documents and be guaranteed the right to present evidence and testimony in support of their claim during the review process;
  4. claimants must be given notice and a fair opportunity to respond before denials at the appeals stage are based on new or additional evidence or rationales;
  5. plans cannot prohibit a claimant from seeking court review of a claim denial based on a failure to exhaust administrative remedies under the plan if the plan failed to comply with the claims procedure requirements unless the violation was the result of a minor error;
  6. certain rescissions of coverage are to be treated as adverse benefit determinations triggering the plan’s appeals procedures; and
  7. required notices and disclosures issued under the claims procedure regulation must be written in a culturally and linguistically appropriate manner.In keeping with this theme, the regulations introduce a strict compliance standard for disability benefits claims procedures. The regulations provide that if a plan fails to follow the claims procedure requirements (with a limited exception), the claimant will be deemed to have exhausted the plan’s administrative procedures, meaning that the claimant can bring a lawsuit and the plan’s determination regarding disability may not receive the special deference otherwise available. The preamble emphasizes that this standard “is stricter than a mere ‘substantial compliance’ standard.” While the regulations provide an exception for de minimis violations, that exception is only available if the de minimis violation (a) does not cause (and is not likely to cause) “prejudice or harm to the claimant,” (b) the violation was “for good cause or due to matters beyond the control of the plan,” and (c) “the violation occurred in the context of an ongoing, good faith exchange of information between the plan and the claimant.” The exception is unavailable “if the violation is part of a pattern or practice of violations by the plan.”

A number of these provisions change the adverse benefit determination notice requirements. The requirement to provide a “discussion of the decision” (see 29 C.F.R. §2560.503-1(g)(1)(vii)), is both a new requirement and a familiar one. In the preamble, the DOL notes that “[i]n the Department’s view, the existing claims procedure regulation for disability claims already imposes a requirement that denial notices include a reasoned explanation for the denial.” Noting that many disability claims notices currently provided by plans are “not consistent with the letter or spirit of the Section 503 Regulation,” the DOL has added additional regulatory specifics with a goal of reinforcing transparency and, in the DOL’s words, “appropriate dialogue” between plans and claimants. Another example of the changes is the new requirement that plans issuing a notice of denial on review must include not only a statement of the participant’s right to bring an action under ERISA §502(a), but also a description of any plan-specific limitations period for bringing a claim (including the calendar date on which the contractual limitations period expires for the participant’s claim).

While the clock ticks down to the effective date of the new requirements, plan fiduciaries should consider consulting with benefit counsel to determine what changes are necessary to ensure plan compliance.