Guest Article

(From the February 4, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

ERISA Claims Procedure: The Cost of Failing to Provide Documents "Free Of Charge" and Follow Procedures in Benefit Appeals

Illustrating the importance of following a plan's established claims procedure under ERISA, a U.S. District Court imposed statutory sanctions of over $14,000 against a plan's Administrative Committee for failing to produce "upon request and free of charge" the records relevant to the denial of a participant's claim for benefits. The court also remanded the claim -- after three years of examination under the plan's claims procedure which resulted in successive denials -- for a potential de novo review. Weddell v. _________.

Brief Factual Background

A retirement plan's Administrative Committee refused to provide "upon request and free of charge" the documents relevant to the denial of a participant's claim for disability retirement benefits. Over a three-year period -- after the participant's initial claim for disability was denied, her subsequent new claim for disability was denied, and her related appeal was denied -- the participant notified the Plan's Administrative Committee of her intention to seek review by the Committee. She requested copies of the Plan and the claims record to be produced free of charge, as provided under ERISA. The Committee furnished the Summary Plan Description, but refused to provide other documents without charge. After 6 months of attempting to procure the documents, the participant filed suit in Federal district court, demanding statutory penalties and either summary judgment in favor of the participant or remand for further administrative review.

Statutory Penalties

ERISA authorizes penalties up to $110 per day against a plan administrator who fails to produce certain documents requested by a participant. As explained in the district court's opinion, the amount of the penalty is discretionary with the court, bearing in mind that the purpose of the penalty is to punish plan administrators who fail to comply with ERISA's explicit requirements. Factors to consider are whether the participant's claim has been prejudiced by the delay, whether the administrator acted in bad faith, and the length of the delay. The court did not find bad faith on the part of the Committee, but noted that the delay did extend the appeals process for the participant, and that a physician "actually observed medical effects" of the claims procedure on the participant.

The court imposed a penalty of $14,220 against the Administrative Committee (i.e., a penalty of $60/day for each of the 237 days the documents were not produced).

Remand for Further Review

The plan's terms provided that the Administrative Committee was responsible for determining whether a participant was entitled to a disability benefit. However, several years prior to the participant's claim, the Committee delegated this responsibility to a third-party administrator (TPA). Under its contract, the TPA would make the initial determination of disability and would also provide a procedure by which the participant could appeal the initial decision. Following a decision by the TPA on appeal, the contract stated that the participant could request another level of appeal with the plan's Administrative Committee. The contract further provided that "doubtful" claims would be referred by the TPA to the Committee. When the TPA denied the appeal, it advised the participant in writing of her right to further appeal the decision to the Administrative Committee.

The Administrative Committee believed that, after it contracted with the TPA, it retained no responsibility for the resolution of disability claims -- that all responsibility had been delegated to the TPA. Apparently for this reason, when the Administrative Committee received the participant's appeal, it did not proceed and viewed the request for documents as a standard document request under ERISA ?104(b) (for which copying fees may be charged), rather than a request incident to the appeal of a denied claim (for which fees may not be charged).

The court relied on the plain meaning of the TPA contract to conclude that the Administrative Committee had indeed retained the authority and duty to consider an appeal from the TPA's final decisions, and that:

The court remanded the case to the Administrative Committee for further review. It cautioned, however, that depending on the precise nature of the relationship between the Administrative Committee and the TPA, the language in the plan and contract by which the Committee retained discretion over decisions made by the TPA may indicate that a de novo review is required (i.e., that the Administrative Committee may not simply review the TPA's record to determine whether the TPA's decision was rational in light of the plan provisions, but instead must perform a full review of the claim).

Lessons

After the TPA spent months gathering information, examining the participant's disability claim in depth, and ultimately issuing a detailed 22-page denial letter in which the basis for the denial was explicitly spelled out, the failure by the Administrative Committee to produce the requested documents and perform the final level of administrative review resulted in a lawsuit, legal fees, the assessment of a $14,000 penalty, and the need to perform a further -- likely de novo -- review of the claim.

The case illustrates the importance of ERISA plan administrators to have an accurate understanding of their contractual relationship with the TPA, of the plan's claims and appeals process, and of their duties and responsibilities in that process. The case also highlights the desirability of having legal counsel review the language in the plan and contract to ensure that it provides the desired standard of review for the TPA's decision. If the plan administrator retains discretion to determine a participant's benefit eligibility, it may be required to perform a de novo review of any appeal taken from the third-party administrator's decision.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2008, Deloitte.