Wednesday, April 18, 2018

New ERISA Disability Benefit Claims Rules and Their Relevance to Workers’ Compensation

During the Oklahoma workers’ compensation opt-out debate of a few years ago, one of the major objectionable features of the opt-out law was the design of the benefit determination “hearings” that employees could be forced into. Opt-out employers, whose “alternative benefit plans” would be governed by ERISA, were at liberty to select benefit eligibility fact-finders, and to pick and choose between competing medical opinions, when disability for work was at issue, with only a vague guarantee that the employee’s treating doctor’s opinion would be considered. This structure was recognized to be in sharp contrast with public workers’ compensation systems governed by state administrative procedure acts and constrained by constitutional notions of procedural due process.

But ERISA administrative hearing procedures (exhaustion of such procedures is required before a court case may be brought) may have just marginally improved, and it is important to maintain contact with developments in ERISA because, whether folks realize it or not, nearly all employee benefits are provided through exclusively-federally-regulated employee benefitplans.” And unless such a plan is a government plan, a church plan, or a plan “maintained solely for the purpose of complying with applicable workmen’s compensation laws or unemployment compensation or disability insurance laws,” it is governed by ERISA. So, whenever you hear of any state-based design to compensate injured workers that “sorta, kinda” sounds like workers’ compensation, but isn’t, you have likely entered the realm of ERISA without realizing it (and, as an aside, it is tax law and the Supreme Court’s opinion in Nationwide Mutual Ins. Co. v. Darden that will determine whether the workers covered by such an alternative scheme are “employees”).

The rationale for the historical license afforded ERISA benefit determinations by plan claims administrators is two-fold. First and foremost, with respect to employee welfare benefit plans (as distinguished from pension plans), ERISA contains no substantive requirements for the content of the plans, which can be terminated and amended at will by employers/plan sponsors. Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73 (1995).  An employer-provided disability plan, for example, may lawfully provide a beneficiary with $5 per month or $5000 per month. All ERISA requires is that an employer provide what it promised to provide in a required written plan instrument (we’ll somewhat dubiously pretend for purposes of this discussion that the employee knew what the plan provided and that this is a good-faith issue of contract).

Second, because the provision of benefit plans in the United States is entirely voluntary—employers provide them to attract talent and gain tax benefits—the concern has been that if one makes the granting of benefits sufficiently onerous, employers will simply stop providing them.

All of this would be well and good were employment not the welfare benefit (especially medical care) delivery vehicle mechanism of first resort for most people. A benefit denial machine—which is the way some commentators have effectively conceived of the structure—possesses diminished social utility.

There has been one caveat to the unfettered control of claim (denial) procedures by plan sponsors (denial occurs administratively either internally, by the Plan, or externally post-denial, if the claimant opts for administrative rather than court review). Under ERISA §503, every employee benefit plan shall—

(1) provide adequate notice in writing to any participant or beneficiary whose claim for benefits under the plan has been denied, setting forth the specific reasons for such denial, written in a manner calculated to be understood by the participant, and

(2) afford a reasonable opportunity to any participant whose claim for benefits has been denied for a full and fair review by the appropriate named fiduciary of the decision denying the claim.

Department of Labor regulations interpreting Section 503 are located at 29 CFR 2560.503-1 and, on April 2, amended regulations, originally promulgated in 2015, were finally implemented. Among the new regulations is this item:

In the case of a plan providing disability benefits, the plan must ensure that all claims and appeals for disability benefits are adjudicated in a manner designed to ensure the independence and impartiality of the persons involved in making the decision. Accordingly, decisions regarding hiring, compensation, termination, promotion, or other similar matters with respect to any individual (such as a claims adjudicator or medical or vocational expert) must not be made based upon the likelihood that the individual will support the denial of benefits. 29 C.F.R. 2560.503-1(b)(7)

That a rule had to be included explicitly requiring that Plans ensure independence, impartiality, and that various employment and retention decisions relevant to adjudicators and experts not be biased is astonishing. It is, indeed, hard to read the rule as other than a tacit admission that the attributes associated with fair hearings have been broadly found wanting.

My workers’ compensation textbook devotes discussion to the issue of whether purported neutral medical structures, in workers’ compensation, are neutral-in-fact. One thing seems clear. If you allow interested parties to structure adjudication, you are likely to wind up with what any reasonably sophisticated citizen might predict. A full review of the new ERISA review regulations suggests that, even allowing for the risk of employers terminating disability benefit plans, a bridge-too-far may have been reached.

Michael C. Duff

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