Deemed Exhaustion of Claims and Appeals Process.

The Regulation: 29 CFR § 2560.503-1 Claims procedure.

(l)Failure to establish and follow reasonable claims procedures -

(1)In general. Except as provided in paragraph (l)(2) of this section, in the case of the failure of a plan to establish or follow claims procedures consistent with the requirements of this section, a claimant shall be deemed to have exhausted the administrative remedies available under the plan and shall be entitled to pursue any available remedies under section 502(a) of the Act on the basis that the plan has failed to provide a reasonable claims procedure that would yield a decision on the merits of the claim.

(2)Plans providing disability benefits.

(i) In the case of a claim for disability benefits, if the plan fails to strictly adhere to all the requirements of this section with respect to a claim, the claimant is deemed to have exhausted the administrative remedies available under the plan, except as provided in paragraph (l)(2)(ii) of this section. Accordingly, the claimant is entitled to pursue any available remedies under section 502(a) of the Act on the basis that the plan has failed to provide a reasonable claims procedure that would yield a decision on the merits of the claim. If a claimant chooses to pursue remedies under section 502(a) of the Act under such circumstances, the claim or appeal is deemed denied on review without the exercise of discretion by an appropriate fiduciary.

(ii) Notwithstanding paragraph (l)(2)(i) of this section, the administrative remedies available under a plan with respect to claims for disability benefits will not be deemed exhausted based on de minimis violations that do not cause, and are not likely to cause, prejudice or harm to the claimant so long as the plan demonstrates that the violation was for good cause or due to matters beyond the control of the plan and that the violation occurred in the context of an ongoing, good faith exchange of information between the plan and the claimant. This exception is not available if the violation is part of a pattern or practice of violations by the plan. The claimant may request a written explanation of the violation from the plan, and the plan must provide such explanation within 10 days, including a specific description of its bases, if any, for asserting that the violation should not cause the administrative remedies available under the plan to be deemed exhausted. If a court rejects the claimant's request for immediate review under paragraph (l)(2)(i) of this section on the basis that the plan met the standards for the exception under this paragraph (l)(2)(ii), the claim shall be considered as re-filed on appeal upon the plan's receipt of the decision of the court. Within a reasonable time after the receipt of the decision, the plan shall provide the claimant with notice of the resubmission.

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The revised claims procedure regulations for ERISA governed plans providing disability benefits includes a strengthened procedure available to claimants when a disability plan administrator fails to establish or follow reasonable claims procedures.  Under the revised rule, if a plan fails to strictly adhere to all the requirement of the claims regulations, the claimant is deemed to have exhausted her administrative remedies available under the plan and can seek remedies in federal court.  The claim or appeal is “deemed denied on review without the exercise of discretion by an appropriate fiduciary.”  29 CFR 2560.503-1(l)(2).  Available remedies would not be deemed exhausted in the case of de minimis violations unless it is part of a pattern of violations by the plan.  The claimant may, but need not, request an explanation for the violation, in which case the plan must provide one within 10 days. 

The rules prior to the revisions already provided that violations would result in a claimant’s available remedies under the plan being deemed exhausted, giving the claimant the right to seek remedies in federal court.  This revision enhances protections for claimants by establishing that the matter is deemed exhausted “without the exercise of discretion” by the plan administrator.  This is important because most plans have “discretionary clauses.”  The Supreme Court Decision in Firestone Rubber v. Bruch established that plans, as fiduciaries, may grant themselves deference in administering the terms of the plan.  If there is no discretionary clause, a federal court would review a claimant’s denial de novo (anew), meaning that the court would make its own determination of the claim.  If there is a discretionary clause, the judge must give deference to the decision of the plan administrator unless it was unreasonable.  The judge is thus reviewing the decision of the plan administrator for reasonableness rather than making her own determination on the merits.  Discretionary authority greatly improves a plan’s chances of winning in federal court.  This rule therefore provides a powerful incentive to plans to adhere to the rules so that they retain discretionary authority to determine claims.

The revised rules could have, but did not, simply provide for a de novo review of any claims that were deemed exhausted.  The Department of Labor in the Supplementary Information to the revised rules explained why it did not add such a provision.  “The Department does not intend to establish a general rule regarding the level of deference that a reviewing court may choose to give a fiduciary’s decision…[But] [t]he legal effect of the definition [of what constitutes a denied claim] may be that a court would conclude that de novo review is appropriate because of the regulation that determines as a matter of law that no fiduciary discretion was exercised in denying the claim.”  29 CFR 2560.503-1(l)(2) at 92328.  The DOL seems to be saying that they do not want to – and perhaps may not have the authority – to tell judges what standard of review should be applied to these cases.  Instead, it is directing essentially that violations of the rules are not fiduciary acts as a matter of law.  As such, courts are unlikely to decide that the fiduciaries are entitled to deference with respect to those acts. 

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