Include Exhaustion Requirements in Plan Documents

October 13, 2020

The subject of administrative exhaustion requirements and the importance of including them in employee benefit plan documents were recently highlighted in a U.S. Court of Appeals for the Sixth Circuit Court decision. In the case of Wallace v. Oakwood Healthcare, Inc., the Sixth Circuit affirmed the Eastern District of Michigan Court’s decision that the plaintiff, Wallace, a Registered Nurse who had contracted an illness while traveling, did not have to exhaust her plan options before pursuing litigation to claim benefits, specifically long-term disability benefits that her employer, Oakwood Healthcare, Inc. provided.  She had submitted claims to the two insurance companies involved: The Hartford Life and Accident Insurance Company, which initially funded and insured the plan, and Reliance Standard which became the insurer of the company’s long-term disability plan.

Steps to a courthouse with white columns

The Court’s Decision Based on Lack of Proper Content in Plan

The Sixth Circuit’s decision was based on its holding that the exhaustion requirement in the claim’s denial letter was not sufficient because, “for a plan fiduciary to avail itself of this Court’s exhaustion requirement, its underlying plan document must – at minimum – detail its required internal appeal procedures.” The Sixth Court went on to also reject the argument that the plan had “substantially complied” with ERISA, stating that “ a plan document that does not include either procedures for review of denied benefits claims or the remedies for such claims is wholly non-compliant. Also noted by the Sixth Circuit in its decision was that plan document failed to include any information about the review procedures or remedies available for denied claims, and was “actively misleading” by mentioning ERISA and the internal claims and appeals process only in an arbitration section of the plan document which did not apply to the plaintiff’s benefit claim.

ERISA’s Intent

In addition to pointing out what does not sufficiently meet ERISA’s administration exhaustion requirements, the Sixth Circuit’s decision also sheds light on what ERISA’s intent is with respect to these requirements. The Court stated, “…one of ERISA’s central goals is to enable beneficiaries to learn their rights and obligations at any time including before a denial of benefits.” This is one of the reasons why plans are required to be developed and maintained in a written document so that plan beneficiaries understand their rights and obligations.

The Takeaway for Plan Sponsors

The lesson learned here is that a plan documents and Summary Plan Descriptions (SPDs) must contain specific language regarding your administrative rights.  It should provide details as to the claims review processes and procedures and next steps relating to the denial of claims.  It should not be misleading such that employees do not believe they have any other administrative entitlements.