United States: Second Circuit Applies Stricter Rules for a Plan Administrator's Noncompliance with Benefit Claims Regulations


The US Court of Appeals for the Second Circuit's recent ruling addresses various issues that could arise during a plan administrator's review of a participant's benefit claim and appeal and any ensuing litigation, including the deference to be granted upon review in a federal court, civil penalties and the possibility of introducing additional evidence outside the administrative record. This decision demonstrates the need for employers to review their benefit plans' claims procedures to ensure they comply with applicable law and best practices.

In Depth

On April 12, 2016, the US Court of Appeals for the Second Circuit in Halo v. Yale Health Plan, 2016 WL 1426291 (2d Cir. Apr. 12, 2016), addressed various issues that could arise during a plan administrator's review of a participant's benefit claim, appeal and any ensuing litigation.  The Second Circuit held that, under the Employee Retirement Income Security Act of 1974, as amended (ERISA):

  • When denying a claim for benefits, a plan administrator's failure to comply with the US Department of Labor's (DOL) claims procedure regulations in 29 C.F.R. § 2560.503‐1 will result in the plan administrator's claim determination receiving no deference on review in federal court, unless the plan's claims procedures fully conform to regulatory requirements and the plan administrator can establish that any failure was inadvertent and harmless;
  • Civil penalties are not available to a plan participant or beneficiary for a plan administrator's failure to comply with the claims procedure regulations; and
  • A plan administrator's failure to comply with the DOL's claims procedure regulations could warrant the introduction of additional evidence outside the administrative record if the claim determination is challenged in litigation.


In Halo, the plaintiff was a college student who was insured under the university's health plan.  The plaintiff underwent eye surgery with doctors who were outside of the plan's network.  The university's health plan stated that treatment with an out-of-network provider was covered under the plan only if it constituted an emergency or if the plan preauthorized the treatment.

Because the participant's surgery did not meet the plan's coverage requirements for out-of-network treatment, the plan administrator denied the plaintiff's claim for coverage.  In her subsequent lawsuit, the plaintiff alleged that the plan and the plan administrator violated the DOL's claims procedure regulations with respect to both the timing and content of the claim denials.

The US District Court for the District of Connecticut held that (1) when exercising discretionary authority to deny a benefit claim, a plan's failure to establish or follow reasonable claims procedures in accordance with the DOL's regulations entitles a claimant to de novo review of the claim in federal court, unless the plan "substantially complied" with the regulation, in which case an arbitrary and capricious standard would apply to the federal court's review of the claim; and (2) a plan administrator's failure to follow the DOL's regulations may result in unspecified civil penalties.  On review, the Second Circuit vacated and remanded the district court's decision.

Standard of Review

The primary issue in Halo focused on what review standard a court should apply when a plan fails to comply with the DOL's claims procedure regulations:  (1) a de novo standard, which allows a court to take a fresh look at the decision without deference; or (2) a much less exacting arbitrary and capricious review standard, which merely requires the plan administrator to interpret a plan's provisions reasonably.  After examining regulatory guidance and applicable case law, the Second Circuit concluded that when denying a benefit claim, a plan's failure to comply with the DOL's claims procedure regulations will result in that claim being reviewed de novo in federal court, unless the plan has otherwise established procedures in full conformity with the regulations and can establish that its failure to comply with the DOL's claims procedures when reviewing the benefit claim was inadvertent and harmless.  The Second Circuit rejected the lower court's substantial compliance doctrine and cautioned that, while minor deviations from the claims procedure regulations may occur, "such deviations should not be tolerated lightly."

Civil Penalties

The Second Circuit also rejected the district court's ruling that civil penalties are available to a participant when a plan fails to comply with the DOL's claims procedures.  The Second Circuit found that the district court's finding that civil penalties could attach to failures to provide a full and fair review was not supported by the regulations or ERISA.

Administrative Record

In reviewing a claim denial, regardless of the review standard, a district court typically limits its review to the administrative record—the documents and information reviewed and considered by the plan administrator in rendering its claim decision.  When there is good cause, however, a district court may exercise its discretion to consider additional evidence outside of the administrative record.  The Second Circuit has previously held that a conflict of interest in the entity tasked with reviewing a benefit claim could constitute good cause and warrant the review and consideration of additional evidence.  In Halo, the Second Circuit stated that good cause could also be expanded to include a plan's failure to comply with the DOL's claims procedures when that failure impacts the administrative record's development.  The Second Circuit therefore held that a plan's failure to comply with the DOL's claims procedures may, in the district court's discretion, constitute good cause warranting the introduction of additional evidence outside the administrative record.  The Second Circuit remanded this determination to the district court.

Halo's Impact on Plan Sponsors and Administrators

The Halo decision presents a mixed message to employers.  On the positive side, the Second Circuit reaffirmed that civil penalties are not available to plaintiffs who sue the plan alleging a violation of the DOL's claims procedures.  On the negative side, the Second Circuit's decision enhances a plaintiff's ability to introduce additional evidence that was not included in the administrative record.  More importantly, the Second Circuit lowered the bar for a plaintiff to argue that a de novo review standard should be applied in the face of administrative review errors.  While the general rule in most circuits is that substantial compliance with the DOL's claims regulations will not change the standard of review from arbitrary and capricious to de novo—even in the face of errors in the claims review process—the Halo decision increases the burden on plans and plan administrators to prove compliance with the DOL's claims regulations in order to preserve deferential review.  This case provides an important reminder for employers to establish written claim review procedures that conform to the DOL's claims regulations and adhere to a disciplined administrative procedure when reviewing benefit claims and appeals.  These procedures include, as the Second Circuit notes, enhanced claims procedures for health and welfare plans in situations governed by the Affordable Care Act.  Given the increased employee protections in ERISA claim review procedures over the past decade (see, for example, DOL's New Disability Claim Rules Add to a Plan Administrator's Duties under Welfare and Retirement Benefit Plans), employers should review their benefit plans' claims procedures, evaluate their compliance with applicable law, and make updates as necessary.

Second Circuit Applies Stricter Rules for a Plan Administrator's Noncompliance with Benefit Claims Regulations

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