In Halo v. Yale Health Plan, 819 F.3d 42 (2d Cir. 2016), the Second Circuit made a significant change to the impact of ERISA claim regulations on subsequent litigation, rejecting the rule that it is sufficient for claim administrators to substantially comply with the regulations. Instead, the court held that, unless there is strict compliance with the regulations, courts will ordinarily conduct a de novo review of claim determinations, though it established a path for administrators to retain the arbitrary and capricious standard of review.
Plainitff was a pro se action brought by a Yale University student who participated in the Yale Health Plan. She underwent eye surgery with doctors within the Yale Plan, and then had further surgery with non-participating doctors. The Plan denied coverage for the non-participating doctors. Plaintiff alleged that the plan violated ERISA claim regulations in a number of ways, including by not providing the reasons why her claim was denied, a description of the additional material necessary to perfect the claim, and a description of review procedures. The district court applied the substantial compliance test in ruling that the arbitrary and capricious standard of review would govern: “while YHP’s communications of its claim denials were not ideal (and in some instances failed to comply with ERISA regulations), the substance and timing of its denials of Halo’s claims were sufficient to indicate that YHP had exercised its discretion, such that [the district court] review[ed] its denials of Halo’s claims under an arbitrary and capricious standard.” The district court also held, somewhat paradoxically and perhaps as dictum, that civil penalties were available if a plan failed to substantially comply with the regulations.
The Second Circuit vacated. It began with a discussion of changes leading to the 2000 edition of the claim regulations, which demonstrated to the court that the DOL intended the regulations to be procedural minimums that were essential to procedural fairness. The court found that principles of trust law, as well as the regulatory and statutory purpose of ERISA, supported de novo review where a plan failed to comply with the ERISA claim regulations.
The court next ruled that strict adherence to the regulations was required, holding that the substantial compliance doctrine was “flatly inconsistent with the 2000 regulation” because the DOL considered and rejected the doctrine when it issued the new regulations in 2000. However, the court noted, based primarily on DOL FAQs, that a plan can avoid de novo review by showing: (1) that it “has otherwise established procedures in full conformity with the regulation[;]” and (2) that it “can show that its failure to comply with the claims-procedure regulation in the processing of a particular claim was inadvertent and harmless.” The court reiterated that the plan bears the burden of proof on this issue.
Next, the court held that the district court erred by ruling that a plan’s failure to comply with the claims procedure regulations could entitle the claimant to civil penalties. The court stated that the regulation did not contain a provision for civil remedies; instead, the remedy is to deem claims denied. Additionally, ERISA contains a number of civil penalty provisions, none of which apply to a violation of this regulation.
Finally, turning to the administrative record, the court “expanded on” its precedent – that district courts will typically limit their review to the administrative record, and will only admit additional evidence if there is good cause to do so – to hold that “good cause to admit additional evidence may exist if the plan’s failure to comply with the claims-procedure regulation adversely affected the development of the administrative record. Entitling a claimant to de novo review based on a plan’s failure to comply with the claims-procedure regulation may be cold comfort if the plan’s own compliance failures produced an inadequate administrative record that would prevent a full and fair hearing on the merits.”