How to Avoid Litigation with a 401k Plan Participant Appeal of a Benefit Claim Decision
The thought of a going through a 401k plan participant appeal process for a prior benefit claim decision should concern all 401k committee members. The Employee Retirement Income Security Act (ERISA), requires plan sponsors to exercise prudence when handling the benefit claims and during the appeal process. To make sure you are fulfilling your fiduciary duty as required under the law, it is best to first be aware of the requirements? Knowing and following the requirements is the cleanest way to avoid litigation when a plan participant files a benefit claim or appeals a benefit claim decision.
Every Retirement Benefits Committee will work on participant claims and for some of those claims, there is liable to be a follow-up 401k plan participant appeal to work through. The Employee Retirement Income Security Act (ERISA), the law that governs workplace retirement plans, requires plan sponsors to be prudent when handling the benefit claims and during the 403b or 401k plan participant appeal process. To make sure you are fulfilling your fiduciary duty as required under the law, it is best to first be aware of the requirements. Knowing and following the requirements is the cleanest way to avoid litigation when a plan participant files a benefit claim or appeals a benefit claim decision.
So how do you do that? For starters, the plan documents, including the Summary Plan Description (SPD) — the document that explains how the plan works and its benefits — should clearly explain to participants how to file a benefits claim, and if necessary, how to appeal a denied claim. The steps should be easy for participants to understand and follow.
Keep in mind, retirement plans or the sponsoring company may not charge filing fees or costs for filing claims and appeals. Generally, plan fiduciaries and 401k committees must evaluate and decide on claims within 90 days (or 180 days if an extension applies). If a claim is denied, the plan must notify the participant in writing, in plain language, including a specific reason why the claim was denied. It helps to reference the plan provisions on which the decision was based. If more information is needed to review the claim, the letter must state that, as well as what supplemental information is needed and why. The notice must also explain the plan’s procedures and deadlines for submitting an appeal for full review.
Plan fiduciaries have 60 days to review an appeal (120 if an extension applies, and longer in special situations). In addition, they must provide — at no cost to the participant — all requested copies of documents, records and other information relevant to the claim. If the appeal is denied, the plan’s fiduciaries must send a written notice, again, written in plain language that’s easy to understand that details the reasons the appeal was denied and the plan provisions on which the decision was based. The letter must also describe available voluntary appeal levels and the participant’s right to seek judicial review.
Beyond adhering to ERISA requirements, it’s important for sponsors to clearly communicate the claims process to participants and follow it. Retirement plan participants may not initiate a lawsuit until all other claim remedy procedures have been exhausted. Vanguard’s best practices guide for fiduciaries recommends that plan sponsors consider adding a provision in their plan document that clearly spells out limitations for initiating benefits claims lawsuits under the plan. ERISA does not provide an explicit statute of limitations on benefits claims lawsuits. However, as noted in the best practices guide, recent court decisions support a timeframe for limitations that is 1. reasonable, 2. may begin prior to the plan’s claims appeal process, and 3. doesn’t conflict with any other controlling statute. Competent ERISA Counsel can be a valuable asset when navigating statutes and a knowledgeable Third Party Administrator (TPA) can help with the process.
While we recognize that addressing benefit claims and a 403b plan or a 401k plan participant appeal may not be the most riveting of topics, we do know that understanding these rules can help a 401k retirement committee or a benefits committee to keep the plan in compliance. Following ERISA requirements on the prudent handling of claims and appeals not only enables plan sponsors to confidently fulfill their fiduciary responsibilities, it will also help fiduciaries to do right by participants. This will ultimately help them to know how to avoid litigation with their retirement plans.
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