Updating 401(k) plan disability benefit claim procedures

I have questions about updating our prototype 401(k) plan disability benefit claims procedures for the new rules that start 4/1.

1. Does the plan document for the prototype 401(k) plan need to be amended?

2. If it does need to be amended, is the deadline 4/1 or the end of the plan year?

3. Should the prototype document provider be preparing this amendment?

4. If we prepare our own amendment to our prototype 401(k) plan, will it still be a prototype plan?

5. Which of the new rules have to be spelled out in the SPD we give to participants and which ones don't?

1.  Depends on the current definition of disability. 

2.  I'm not sure - I have seen articles from law firms suggesting amend by 4/1.

3.  I would think the prototype provider should be preparing this amendment....or maybe it is an addendum to the BPD, otherwise you risk losing reliance on the letter.  Check with the provider.

4.  See #3 above.  Again, I would contact the document provider and ask to speak to someone in legal.

5.  The SMM should be generated off the amendment.  I would check with your document provider.

If you have a definition like determined by SSA, then the plan is not impacted.  However, I would still check with the document provider to determine if a clarification will be made in this case - for example, determination will be made by a party unrelated to the plan...

Frustratingly, neither the old or new reg defines "disability benefit." However, tucked away in the preamble of the new reg is the following footnote 3. It seems unlikely that many 401(k)'s or other DC retirement plans will have disability benefits:

A benefit is a disability benefit, subject to the special rules for disability claims under the Section 503 Regulation, if the plan conditions its availability to the claimant upon a showing of disability. If the claims adjudicator must make a determination of disability in order to decide a claim, the claim must be treated as a disability claim for purposes of the Section 503 Regulation, and it does not matter how the benefit is characterized by the plan or whether the plan as a whole is a pension plan or a welfare plan. On the other hand, when a plan, including a pension plan, provides a benefit the availability of which is conditioned on a finding of disability made by a party other than the plan, (e.g., the Social Security Administration or the employer’s long-term disability plan), then a claim for such benefits is not treated as a disability claim for purposes of the Section 503 Regulation. See FAQs About The Benefit Claims Procedure Regulation, A–9 (www.dol.gov/sites/default/files/ebsa/about-ebsa/ our-activities/programs-and-initiatives/outreach-

and-education/hbec/CAGHDP.pdf).

Most of our plans use the LRM definition which is based on the Committee determination, and not an outside party.

An earlier BenefitsLink discussion included an observation that, for many 401(k) plans, a plan's administrator often need not consider whether the participant is disabled - a severance-from-employment alone usually is enough to provide grounds for the distribution.

Just to make sure we're all on same page, the "benefit" is going to be, although not required for qualification, accelerated vesting if you leave on account of disability, and a relaxation of a last day of year requirement for an allocation, right?

Luke Bailey introduces two questions some of us had not thought about.

Is a disability exception from a last-day condition on sharing in an allocation of a contribution a benefit to be decided under the new claims-procedure rule?

"On the other hand, when a plan, including a pension plan, provides a benefit the availability of which is conditioned on a finding of disability made by a party other than the plan, (e.g., the Social Security Administration or the employer’s long-term disability plan), then a claim for such benefits is not treated as a disability claim for purposes of the Section 503 Regulation"

My question on this is: many plans say that the determination of total and permanent disability will be made by a "licensed physician." But I'm presuming that in many cases, this physician will be chosen by the Plan Administrator. With that discretionary authority, I'm afraid that it then falls under this blasted regulation. Any thoughts on this?

Sorry about the small font...

To return to the first of the five questions in prototypical's originating post, whether there is a need to amend the plan's governing document might turn on how much of the plan's claims procedure is embedded in, or separate from, the plan's governing document.

Also, meeting some conditions the ERISA section 503 rule calls for might involve provisions beyond the employee-benefit plan's documents and procedures.

Please confirm that the "disability benefits" we are talking about in DC retirement plans are accelerated vesting (if in the plan document) and waiver of last day of year requirement (again, if in the plan document). If there are other disability benefits in DC plans, I would like to know.

Thanks.

In the precious few plans that do not allow distribution prior to a specific age one might find the age lower upon disability.

A DC plan with accelerated vesting only or even with qualification for an allocation based on disability may be tempted to rubber stamp all disability claims.  After all, the new regulation is only really an issue if the claim is being questioned.  But, the DC plan is also charged with making a proper determination on the 1099-R as to whether the distribution should be subject to the 10% premature distribution.

Do BenefitsLink mavens agree that one need not apply ERISA section 503 claims procedure if the ONLY decision is about which tax-information codes to report or omit in a Form 1099-R?

I certainly would agree with you, Peter. As Mike Preston's earlier response alludes to, there may be a few instances where a DC plan does not generally permit a distribution before attainment of a stated age, with disability being an exception. In such a case, perhaps the benefit is contingent on the plan administrator's determination of disability, so the 503 regs arguably could apply thn. However, in the vast majority of cases, the benefit is payable on separation from service, and that's the reason for the distribution. It's just that the participant may have separated from service because he or she was disabled. So the benefit in that case is not contingent in any way on a determination by the plan that the participant is disabled. The issue of disability only arises because the plan administrator may need to consider it in connection with filling out a government form. Either way, the benefit will be paid. Also, I think that in filling out the 1099-R the plan administrator is really testifying to the IRS, to the best of it's knowledge consistent with the expectations regarding due diligence regarding the accuracy of the form's completion. The plan administrator is not making a determination that the individual is disabled to the point that he/she cannot pursue any occupation (which is what 72(m)(7)).