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8 Best Practices For Handling ERISA Benefit Claims

By Michael Graham and Leigh Jahnig (September 27, 2019, 4:59 PM EDT)

This article addresses compliance considerations and best practices for the
administration of benefit claim procedures, including internal review of denied
benefit claims, under employee benefit plans governed by the Employee
Retirement Income Security Act. As discussed herein, the appropriate plan
fiduciaries’ failure to implement and follow compliant claims procedures can have
costly consequences for plan sponsors.

ERISA Claims Administration Basics

ERISA requires employee benefit plans to provide participants and beneficiaries Michael Graham
adequate written notice of a benefits claim denial. That notice must set forth the
specific reasons for the denial and afford the participant or beneficiary a reasonable
opportunity for a full and fair review of a denied claim. The U.S. Department of
Labor has promulgated regulations that contain minimum requirements for
employee benefit plan procedures pertaining to claims for benefits.

It is mandatory to establish and maintain written claim procedures for an ERISA

employee benefit plan. These must be set forth in the plan’s summary plan
description or in a separate document that accompanies the SPD. In the latter case,
the SPD must disclose that the claims procedures are provided separately and are
available free of charge. Leigh Jahnig

The claims administration rules have both procedural and substantive components. All applicable ERISA
plans must have reasonable procedures in place that allow participants and beneficiaries the ability to
apply for and, where entitled, receive the plan’s promised benefits.

The principal compliance concerns include:

• The availability and communication to participants and beneficiaries of fair and fulsome claim
appeal procedures;

• Communication of time frames for making initial claim determinations and claim appeal
decisions;
 • Following regulatory requirements for contents of the notices required for denied initial claims
and adverse claim appeal decisions; and

• Permitting the free flow of information relevant to the benefit determination.

Plans providing benefits upon a disability and nongrandfathered Affordable Care Act-covered group
health plans are subject to enhanced procedural safeguards (including the right to an external appeal
under the ACA rules).

Responsibility for Claims Administration

Plan administrators (whether named, designated or otherwise) act as ERISA fiduciaries when conducting
claim administration and review, and are subject to ERISA’s fiduciary requirements in fulfilling their
duties regarding claims review.[1] Although third-party service providers typically carry out these
activities, it is important for the plan sponsor, administrative committee or other responsible plan
fiduciary to understand the requirements to fulfill its fiduciary role by the prudent selection and
monitoring of the service providers.

Exhaustion of Internal Claims Procedures

In accordance with ERISA’s claims administration regulations, claimants typically must exhaust the plan’s
internal claims procedures as a prerequisite to pursuing a civil action under ERISA (or requesting an
external review under the ACA). However, the exhaustion requirement will not apply if the plan does
not adhere to the minimum regulatory standards.

If a claimant can show that a plan’s internal procedures do not comply with these rules (or the plan
failed to follow compliant procedures), any requirement to exhaust the internal administrative process
is deemed satisfied. Moreover, as discussed further below, courts will not give deference to the plan
fiduciary’s decision to deny benefits or any conclusions drawn by the fiduciary in a flawed claims
administration process.

The exhaustion rule should be clearly and explicitly set forth in the plan and claims procedures provided
to participants or it may be held not to apply.[2]

Under informal DOL guidance, there is a so-called minor errors exception to the exhaustion rule that
applies when a plan’s failure to apply a compliant process is inadvertent and does not prejudice the
claimant, provided the plan allows for an opportunity to effectively remedy the failure. For plans subject
to the ACA and disability benefit claim procedures, there is a somewhat narrower exception for de
minimis noncompliance.

Courts have adopted a substantial compliance doctrine consistent with this approach to de minimis
errors, although the doctrine has been called into question following the DOL’s overhaul of the claim
procedure regulations in 2002. For a recent discussion, see Fessenden v. Reliance Standard Life
Insurance Co., (finding that adverse benefit determination delivered eight days late, and after claimant-
initiated lawsuit, should have resulted in de novo review and holding that substantial compliance in the
Seventh Circuit does not extend to blown deadlines).[3]

Judicial exceptions from the exhaustion rule have included cases that are permitted to proceed because
going through the internal process would be futile, would otherwise deny meaningful access to a full
and fair review, or would cause a harmful delay in claim adjudication.[4]

Importance of Claims Administration Compliance in Defending ERISA Suits

Consequences of Claims Administration Noncompliance

Perhaps more important than the exhaustion implication, if a plan administrator fails to adhere to any of
ERISA’s minimum standards for benefit determination and appeal procedures, the plan administrator
will lose the deference that would typically have been afforded to its benefit determination and plan
interpretation as the court will apply a de novo review standard for the claim.

In 2014, the U.S. District Court for the District of Connecticut ruled in Halo v. Yale Health Plan that civil
penalties can also be awarded for a plan’s failure to comply with the claim procedures regulations.[5]
However, this was inconsistent with several courts of appeals decisions, and the U.S. Court of Appeals
for the Second Circuit overturned the ruling, because, among other reasons, ERISA’s claims procedure
rules offer remedial relief for noncompliance, but do not contain a civil penalties provision, unlike other
ERISA provisions.[6]

While the appeals court’s ruling in Halo gave reason for plan administrators to breathe a sigh of relief by
rejecting civil penalties for claim processing failures, that same decision should also gave them reason
for caution.

Ordinarily, a federal court reviews a plan’s benefit denial under the deferential arbitrary and capricious
standard. But in Halo, the court held that if a plan denies a claim for benefits and fails to comply with
the claims procedure regulations, courts will review that claim de novo instead, "unless the plan has
otherwise established procedures in full conformity with the regulation and can show that its failure to
comply with the claims-procedure regulation in the processing of a particular claim was inadvertent and
harmless."[7]

Further, Halo contained another potential pitfall for administrators who do not closely follow claims
procedure regulations:

[We] hold that a plan’s failure to comply with the claims-procedure regulation may, in the district
court’s discretion, constitute good cause warranting the introduction of additional evidence
outside the administrative record.[8]

Other courts have since followed this model, both in applying de novo review when a denial of benefits
determination violated the claims procedure regulation’s requirements and permitting district courts to
consider relevant materials not in the administrative record if noncompliance with the benefit denial
review process adversely affected development of the record.[9]

These cases underscore the importance of consistently following claims procedure rules. While failing to
follow these regulations closely may not result in an immediate monetary penalty, losing the deferential
review standard can prolong the litigation, leading to significantly higher costs. To avoid costly
complications, plan administrators should confer with in-house or outside counsel to make sure that
their claims procedures are in line with the requirements.

Inconsistency in Claims Administration Can Hurt You

The best way to protect defenses in future litigation is to make a clear, final claim determination. Even
when administrators do not fall into the traps discussed above and do obtain the deferential arbitrary
and capricious standard of review, inconsistencies in their claims review processes can still haunt them.

In Patterson v. Aetna Life Insurance Co., for example, the plaintiff claimed long-term disability benefits
resulting from a back injury.[10] The plan administrator initially approved the benefits and continued
paying them for seven years. But after additional surveillance and vocational analysis, the administrator
terminated the plaintiff’s benefits.

The U.S. District Court for the District of New Jersey held that the decision to terminate benefits was
arbitrary and capricious, largely because the administrator had not conducted an independent medical
examination and the administrator evaluated the same evidence at different times and reached
different conclusions. The court was particularly troubled by the administrator’s argument that the
original award of benefits was erroneous: "A retroactive finding that a plaintiff was never entitled to LTD
benefits, without new medical information, is itself evidence of arbitrariness and capriciousness."[11]

The DOL regulations require that a plan’s "claims procedures contain administrative processes and
safeguards designed to ensure and to verify that benefit claim determinations are made in accordance
with governing plan documents and … have been applied consistently with respect to similarly situated
claimants."[12] In the preamble to the final claim regulations, the DOL noted that courts have long
recognized that such consistency is required even under the most deferential judicial standard of
review.[13]

Failing to Respond to Plan Document Requests: Civil Penalties and Other Adverse Consequences

One of the more ministerial acts that an ERISA plan administrator must perform is responding to a
participant’s or beneficiary’s request for plan documents. Timeliness matters. Failing to furnish, within
30 days after a written request, an ERISA plan’s latest summary plan description, annual report, terminal
report, trust agreement, or the documents under which the plan is established or administered can
result in civil penalties.

Under ERISA Section 502(c)(1), the DOL (or a court) has discretion to award a civil penalty of up to $110
per day for each alleged violation.[14] While the DOL may assess a civil penalty for failing to provide plan
documents, participants or beneficiaries may also file a complaint in federal court seeking the civil
penalty against the plan administrator.

These complaints may be filed individually, but often are pleaded in conjunction with another alleged
ERISA violation, such as a wrongful denial of benefits claim. A court has great discretion when deciding
whether to implement a civil penalty, and typically considers whether the participant or beneficiary
suffered any prejudice by the nonreceipt of the plan document and whether any mitigating factors exist
to excuse the plan administrator’s failure or delay in responding.[15]

Timely response to document requests sometimes falls through the cracks, but plan administrators
should be especially mindful of these obligations in the context of denied benefit claims, since there
may be increased risk of civil penalty liability. In one extraordinary case, Cromer-Tyler v. Teitel, the
plaintiff, a former employee in a surgical practice, did not receive any plan documents until after she
filed a suit for wrongfully denied benefits. The documents were provided four and half years after her
first request.[16]
Here, the plaintiff won her claim after a bench trial, and the court awarded the full penalty of $110 per
day for each of the 1,636 days the administrator failed to provide the documents: $179,960.[17] While
Cromer-Tyler is an extreme example, even a less egregious violation can have consequences. Moreover,
the U.S. Court of Appeals for the Fourth Circuit recently reminded litigants while findings of prejudice
and bad faith are relevant to a penalty determination, they are not required.[18]

To avoid missing plan document requests, it can be helpful to direct all incoming participant
communications to the same person or group within the organization for identification and processing
of document requests. Consider procedures for date-stamping requests as received and tracking them
through processing to ensure timely responses.

Managing Conflicts of Interest

It has long been recognized that a particular danger exists for biased benefit claim determinations in
certain benefit plan arrangements where a single entity is ultimately responsible for both funding the
plan benefits and processing claims (such as for many employer self-funded plans). The U.S. Supreme
Court recognized as much in Metropolitan Life Insurance Co. v. Glenn, holding that a reviewing court
should consider such inherent conflicts of interest as a factor in determining whether the plan
administrator has abused its discretion in denying benefits.[19]

Glenn does not, however, subject such cases to de novo review. Rather, courts are required to weigh the
significance of the conflict, which will depend upon the circumstances of the particular case, to
determine whether the plan administrator abused its discretion (therefore making the deferential abuse
of discretion standard inapplicable).

A significant side effect of Glenn is to subject the plan sponsor or other fiduciary defendants to
additional discovery to determine the existence and extent of any conflict of interest. For example, a
history of claims administration decisions that give the appearance of a predominant bias on behalf of
the plan or administrator could be an important factor for a court to assess the significance of the
conflict on the claim at issue.

Plans should implement internal controls and procedures that are reasonably designed to ensure
accuracy and mitigate inherent conflicts of interest, such as:

• Insulating claims processors from influence by the organization’s financial departments;

• Excluding top-level officers from fiduciary oversight roles;

• Ensuring claims processor compensation (or other benefits or terms of employment) and third-
party claims administrator fees are not in any way dependent upon the outcome of claims
decisions;

• Conducting periodic audits of claims decisions to ensure accurate decision-making and identify
potential patterns of bias; and

• Establishing criteria and standards that are as objective as possible for benefit entitlements.

Being able to demonstrate these measures can help counteract the weight a court may otherwise place
on an apparent conflict of interest and preserve a greater degree of judicial deference.

Best Practices for Benefit Claims Administration

For a plan administrator, small decisions can have big impacts on future litigation. Some suggestions for
plan administrators to protect against, or at least limit, possible civil penalty exposure and the loss of
litigation defenses include those listed below.

1. Read and Understand All Relevant Documents

Study all relevant plan documents (e.g., the plan and any amendments or appendices, the summary plan
description, governing insurance policies or contracts, any collective bargaining provisions affecting plan
benefits or administration, etc.) along with the plan’s internal procedures and protocols. Identify and
resolve any ambiguities, inconsistencies or omissions.

2. Track Claims for Timely Processing

Create a docketing system where benefit claims and document requests are logged, tagged with
relevant deadlines and continuously tracked.

3. Maintain Communication With Counsel

Copy in-house and outside counsel on communications as appropriate and seek legal advice in the event
of any uncertainty as to compliance responsibilities, steps or timelines. Extra work — and early inclusion
of counsel — on the front end can help avoid a civil penalty, losing a litigation defense or prevailing
party status, or otherwise hampering the defense of an ERISA claim down the road.

4. Maintain Communication With Other Plan Fiduciaries

Regularly report on claim processing activities. If other fiduciaries are responsible for other aspects of
plan administration, work together to ensure that claimants are receiving timely responses to document
and information requests.

5. Create a Complete Record — Procedural and Substantive

Build an administrative record of a claim’s history while executing a plan’s claim and appeals procedure.
This is of utmost importance if the matter is litigated. Document everything, not just decisions, but also
any and all tasks commenced and complete involving the processing of each claim.

• Ensure you can demonstrate procedural compliance with ERISA and the internal rules in every
case.

• Log all documents, records and information relevant to the claim so they can be easily identified
for purposes of meeting disclosure obligations. The DOL expects claimants to be provided with
anything the plan actually used to deny a benefit claim (e.g., specific plan rules or guidelines
governing the application of specific protocols, criteria, rate tables or fee schedules applied;
physicians’ evaluations or other reports reviewed when considering the claim; any checklists
relied upon to affirm appropriate claim processing; etc.) as well as documents, records, or other
 information submitted, considered, or generated for purposes of making the benefit
determination, whether or not it was actually used.

6. Establish and Follow Clear Procedures for Uses of Authorized Representatives

You must allow a claimant’s authorized representative to act on behalf of the claimant for the benefit
claim and review process. However, the plan can and should have clear, easy-to-follow, well-
communicated procedures for claimants to designate someone as their authorized representative, such
as through a representative designation form completed by the claimant.

Be sure that all claims fiduciaries understand the extent to which an authorized representative will be
acting on behalf of the claimant (e.g., will the representative be the sole recipient of notices or will the
claimant receive a copy). Also remember that a health care professional treating the claimant or
otherwise knowledgeable about their condition must be permitted to act on the claimant’s behalf for a
group health plan’s urgent care claim, even without any designation.[20] You can require a Health
Insurance Portability and Accountability Act authorization for this purpose so the plan can provide
protected health information to the health care professional, if required.

7. Clearly Disclose Any Plan-Based Time Limits for Commencing a Lawsuit

Many plans set a time limit within which claims must be filed in court after exhaustion of the internal
process. ERISA doesn’t provide an explicit statute of limitations on benefit claim lawsuits (relying instead
on the most applicable underlying state law limitation), but the Supreme Court has upheld plan-based
contractual limitations that are reasonable in scope.[21]

Periods of less than one year following the final internal appeal decision have been held reasonable by
various courts, but one to three years is typical. In any case, you must ensure all claimants are aware of
the limitation.

In addition to stating the rule in the plan document and summary plan description, include any
contractual limitations period in any claim denial notice that discusses the civil litigation remedy.
Moreover, for a disability benefit claim, you must not only state the limitation rule but also identify the
calendar date on which the right to sue over the instant claim will expire in an adverse determination on
appeal, though this is a best practice for any type of claim.

8. Follow Applicable Rules for Culturally and Linguistically Appropriate Notices

Under the ACA and disability benefit claims procedure rules, if the claimant’s address is in a county
where 10% or more of the county’s population are non-English literate, any claim denial notices must
include a statement, in the applicable non-English language, clearly indicating how to access the plan’s
language services (which must include arrangements to provide information (including the contents of
the notice) and other assistance in the applicable non-English language).

Michael T. Graham is special counsel and Leigh J. Jahnig is an associate at Jenner & Block LLP.

This article is excerpted from Lexis Practice Advisor®, a comprehensive practical guidance resource that
includes practice notes, checklists, and model annotated forms drafted by experienced attorneys to help
lawyers effectively and efficiently complete their daily tasks. For more information on Lexis Practice
Advisor or to sign up for a free trial, please click here. Lexis is a registered trademark of RELX Group, used
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Law360 is owned by LexisNexis Legal & Professional, a RELX Group company.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its
clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general
information purposes and is not intended to be and should not be taken as legal advice.

[1] See Aetna Health Inc. v. Davila, 542 U.S. 200, 220 (2004).

[2] See Greiff v. Life Ins. Co. of N. Am., 386 F. Supp. 3d 1111, 1116 (D. Ariz. 2019) (plan terms regarding
exhaustion held to be ambiguous and unenforceable).

[3] Fessenden v. Reliance Std. Life Ins. Co., 927 F.3d 998, 1004-05 (7th Cir. 2019).

[4] See, e.g., Springer v. Wal-Mart Associates' Group Health Plan, 908 F.2d 897, 900-01 (11th Cir. 1990).

[5] Halo v. Yale Health Plan, 49 F. Supp. 3d 240, 268-69 (D. Conn. 2014), vacated, 819 F.3d 42 (2d Cir.
2016).

[6] Halo, at 819 F. 3d at 58-60.

[7] Halo, at 819 F. 3d at 58.

[8] Halo, at 819 F. 3d at 45.

[9] E.g., Aitken v. Aetna Life Ins. Co., 2018 U.S. Dist. LEXIS 164008, at *37-38, *42-43 (S.D.N.Y. Sept. 25,
2018); Salisbury v. Prudential Ins. Co. of Am., 238 F. Supp. 3d 444, 451 (S.D.N.Y. 2017).

[10] Patterson v. Aetna Life Insurance Co., 2017 U.S. Dist. LEXIS 175543 (D.N.J. Oct. 23, 2017).

[11] Patterson, 2017 U.S. Dist. LEXIS 175543 at *34.

[12] 29 C.F.R. § 2560.503-1(b)(5).

[13] 65 Fed. Reg. 70,246, 70,251, n.26 (Nov. 21, 2000) (citing Lutheran Medical Center v. Contractors,
Laborers, Teamsters & Eng’rs Health & Welfare Plan, 25 F.3d 616, 620-22 (8th Cir. 1994) and De Nobel v.
Vitro Corp., 885 F.2d 1180, 1188 (4th Cir. 1989)).

[14] ERISA § 502(c)(1) (29 U.S.C. § 1132(c)(1)); 29 C.F.R. § 2575.502c-1.

[15] See, e.g., Hager v. DBG Partners, Inc., 903 F.3d 460, 470-71 (5th Cir. 2018); McDonald v. Pension
Plan of the NYSA-ILA Pension Trust Fund, 320 F.3d 151, 163 (2d Cir. 2003).

[16] Cromer-Tyler v. Teitel, 2007 U.S. Dist. LEXIS 67190 (M.D. Ala. 2007).

[17] Cromer-Tyler, 2007 U.S. Lexis 67190 at *19.

[18] Carroll v. Cont’l Auto., Inc., 685 F. App’x 272, 276–77 (4th Cir. 2017) (upholding penalty of $50 per
day for the delay in producing plan documents absent any finding of prejudice or bad faith).

[19] Metropolitan Life Ins. Co. v. Glenn, 554 U.S. 105 (2008).

[20] See 29 C.F.R. § 2560.503-1(b)(4).

[21] Heimeshoff v. Hartford Life & Accident Ins. Co., 571 U.S. 99 (2013).