News & Information

CCH® UNEMPLOYMENT INSURANCE — 10/29/09

SSA eliminates oversight review of representative fees paid by third parties

The Social Security Administration has revised its regulations so as to now allow representatives to charge and receive a fee from third parties without requiring authorization by the agency in certain circumstances. The SSA also is eliminating the requirement that legal guardians or court-appointed representatives who represent claimants before the agency seek authorization prior to charging a fee.

The new rules become effective October 23, 2009, and apply to all relevant fee authorization requests that have not yet been authorized as of the effective date, regardless of the date on which representatives filed the request.

Background

Under current rules, all representatives are required to obtain approval from the SSA for any fee charged for representing a claimant before the agency. (See 20 CFR Regs. §404.1720 and §416.1520.)

The SSA also prohibits representatives from charging or receiving fees that are more than the amount it approves regardless of whether the fee is charged to or received from claimants or third parties. (See paragraph (b)(3) in each of the regulations listed above.) However, under the agency's long-standing interpretation of these regulations, as set forth in Social Security Ruling (SSR) 85-3, if certain criteria are met, it will not require approval of a fee if a nonprofit organization pays the fee out of funds provided by a government entity.

SSA now sees little risk to claimants

The revised regulations will allow representatives to be paid fees for representing of a claimant before the SSA when the fees are paid by a third party, such as an insurance company, so long as the claimant is free from any liability for the fee and the representative waives the right to charge and collect one. The SSA's approval of the fee request also would not be necessary where a court has already authorized the fee in cases where legal guardians or court-appointed representatives provide representational services in claims before the agency.

In the amended regulations, the term “entity” is used to refer to the third party and is defined to include “any business, firm, or other association, including but not limited to partnerships, corporations, for-profit organizations, and not-for-profit organizations” in final regulations §404.1703 and §416.1503. The amended provisions in §404.1720(e)(1) and §416.1520(e)(1) expressly state that the SSA does not need to authorize a fee if an “entity or a Federal, State, county, or city government agency uses its funds to pay the representative fees and expenses” and certain other criteria are met.

According to the SSA, the primary reason to set maximum fees is to protect claimants and beneficiaries. Thus, explains the agency,

“[W]hen certain third parties are responsible for paying the representative for his or her services, there is no risk that the claimant or auxiliary beneficiaries will be charged an unreasonable fee. Third-party entities, such as insurance companies, often provide representation to claimants and pay the representatives' fees at no cost to the claimants or auxiliary beneficiaries. We do not believe that we need to authorize fee arrangements between representatives and third-party entities if claimants and auxiliary beneficiaries are not responsible for paying fees or expenses directly or indirectly.”

SSR 85-3 is rescinded

Along with the finalized amendments discussed above, the SSA also is rescinding SSR 85-3 since its policies are now codified in the amended regulations. (The full text of the notice of rescission will appear in an upcoming Report.).

Concerns expressed by some practitioners

Upon learning of the proposed amendments, some attorneys have expressed concern, noting that in cases where an individual receives a disability insurance benefit from a private insurer who then hires a representative to pursue the Social Security disability claim, there is potential for abuse. If the claimant is later awarded a Social Security disability insurance benefit and is paid a substantial amount in back benefits, for which the representative charges the private disability insurer a 25% contingency fee, depending upon its contract with its insured —the disability insurer could then seek to recover the fee from its insured, even if the fee is otherwise unreasonable by Social Security standards. In such a scenario, claimed one official commentator, there is no oversight. In response, the SSA stated that a representative is still barred from collecting a fee, either directly or indirectly, from a claimant without prior authorization. “This prohibition applies regardless of any contractual language between a claimant and an entity,” said the SSA.

Another commentator was concerned that third parties should not be relied upon to protect a claimant's interests because of inherent conflict of interest issues, citing multiple lawsuits against long-term disability insurers for bad faith. The SSA dismissed this claim, citing a lack of evidence.

Other than some minor clarifying changes, the final regulations are nearly identical to the amendments as proposed in the notice of proposed rulemaking published in the August 26, 2008, Federal Register.

The full text of the notice of final rulemaking was published in the September 23, 2009, Federal Register (74 Fed. Reg. 48381).