Are Your Executive Compensation Arrangements Safe from the New Disability Regulations?



Beginning April 1, 2018, new disability claim regulations may apply to some executive compensation arrangements. Given this pending regulatory deadline, employers need to analyze which of their executive compensation arrangements may be subject to the enhanced requirements for disability claims review.

In Depth

The US Department of Labor (DOL) recently confirmed that the final claims procedure rules applicable to ERISA-covered employee benefit plans that provide disability benefits (the Final Rule) will be applicable beginning April 1, 2018. As a follow up to McDermott’s client alert on the requirements under the Final Rule, plan sponsors should note that the Final Rule may also apply to various executive compensation arrangements which are not otherwise structured to be exempt from the application of the Final Rule. Given the imminence of the April 1 implementation date, employers should analyze which of their executive compensation arrangements may be subject to the enhanced requirements for disability claims review under the Final Rule.

What Are the New Requirements?

Overall, the Final Rule is designed to ensure that claims for disability benefits are evaluated in a transparent and impartial manner. In general, under the new rules:

  • Individuals tasked with adjudicating disability claims and appeals must be impartial and independent;
  • Disability benefit denial notices must contain a “discussion of the decision,” including the adjudicator’s basis for not following disability determinations by the Social Security Administration (SSA) or other third payers, or for disagreeing with the views of health care or vocational professionals treating a claimant;
  • Claimants must be given an opportunity to review and respond to new evidence or rationales developed by the plan during the pendency of an appeal;
  • Written notices to claimants must be presented in a culturally and linguistically appropriate manner; and
  • Adverse benefit determinations on review must include any applicable contractual limitations period for filing a civil action.

What If the New Requirements Are Not Followed?

If an employer fails to comply with the requirements in the Final Rule, then a claimant will be deemed to have exhausted administrative remedies (with limited exceptions), and the claimant would thus be permitted to file suit in court to seek review of a disability benefits denial. In the case of a deemed exhaustion due to a plan’s failure to follow the Final Rule, the reviewing tribunal will be required to give no special deference to a plan’s previous decision and instead review the claim dispute de novo.

How Do the New Rules Apply to Executive Compensation Arrangements?

A benefit claim will be subject to the Final Rule if the benefit is conditioned upon a claimant’s disability and the claims adjudicator must make a determination of disability in order to decide the claim. However, if a plan links the finding of disability to a determination made by a party other than the plan (e.g., a finding made under the employer’s long term disability plan or a determination of disability made by the SSA), then the special rules for disability claims are not applicable to a claim for benefits under such plan.

However, keep in mind that certain executive compensation arrangements are typically excluded from the application of ERISA (such as most equity-compensation arrangements and short-term bonus programs which do not “systematically defer payment to the termination of covered employment or beyond”). In those instances, the Final Rules will not apply. To the extent these types of exempt ERISA plans provide for accumulations of deferred amounts, multiple year tracking or accumulation periods and/or mandatory deferrals, those arrangements may be pulled back within the scope of the ERISA and thereby the claims rules. Employers are advised to check with legal counsel regarding the underlying characteristics of these arrangements to ensure their exclusion from ERISA.

Therefore, whether the Final Rule applies to an executive compensation arrangement is dependent on (1) whether the particular executive compensation is subject to ERISA and thereby ERISA’s claims procedure requirements, (2) whether there is a disability payment trigger under the executive compensation arrangement and (3) how the disability determination is made under the executive compensation arrangement. If the executive compensation arrangement contains language giving the employer, a committee or a specific individual the authority to make a disability determination that will trigger a payment from the plan, then the arrangement will then be subject to the requirements in the Final Rule.

Next Steps – What Executive Compensation Arrangement Should Be Reviewed for Disability Provisions?

Employers should review whether any of the following executive compensation arrangements are subject to the ERISA claims procedure rules and have disability payment triggers. Then, employers should identify who ultimately controls the disability determination:

  • Employment Agreements
  • Annual Incentive Plans (potentially subject to exemption)
  • Long-Term Incentive Plans
  • Nonqualified Deferred Compensation Plans and Supplemental Retirement Plans
  • Equity Compensation Arrangements (potentially subject to exemption)

To the extent a disability determination under these arrangements is not made by a third party (such as the SSA or the employer’s long-term disability insurance carrier), the employer should evaluate whether to (1) amend the executive compensation arrangement to be exempt from the Final Rule or (2) review and modify its procedures for making disability determinations to comply with the Final Rule. As many of the new requirements are often behind-the-scenes administrative compliance issues for executive compensation arrangements, applicable plan documents may not need to be amended to comply with the Final Rule. However, it is important that employers understand whether the Final Rule applies to such arrangements so that a deemed exhaustion of claim administrative remedies does inadvertently occur, triggering a de novo review by the applicable tribunal.