ORDER

G. MURRAY SNOW, District Judge.

Pending before the Court is Plaintiff Jamie Lynne Kobyluck's appeal of the Social Security Administration's decision to deny her benefits, (Doc. 2). For the following reasons, the Court remands for further proceedings.

BACKGROUND

On January 2, 2014, Mrs. Kobyluck filed an application for disability insurance benefits, alleging a disability onset date of July 8, 2012. (Tr. 23.) Her claim was initially denied on July 21, 2014 and it was denied again upon reconsideration on January 16, 2015. (Id.) Mrs. Kobyluck then filed a written request for a hearing and she testified before Administrative Law Judge ("ALJ") Earl C. Cates, Jr. (Id.) On November 30, 2015 the ALJ issued a decision finding Mrs. Kobyluck not disabled. (Tr. 32.)

In evaluating whether Mrs. Kobyluck was disabled, the ALJ undertook the five-step sequential evaluation for determining disability.1 (Tr. 23-24.) At step one, the ALJ found that Mrs. Kobyluck had not engaged in substantial gainful activity since July 8, 2012, the alleged onset date. (Tr. 25.) At step two, the ALJ determined that Mrs. Kobyluck suffered from multiple sclerosis ("MS") and type II diabetes, both of which are severe impairments. (Tr. 25.) However, at the same step, the ALJ also determined that the claimant's memory impairment, that is related to her MS, and her alleged neuropathy were non-severe ailments. The ALJ made this determination at step two even though the medical records determined that the claimant did suffer from memory impairment that resulted from her MS and that she did have neuropathy secondary to her diabetes. (Tr. 25-28.) At step three, the ALJ determined that none of Mrs. Kobyluck's severe impairments equaled or met the severity of any of the Social Security Administration's listed impairments. (Id.)

At that point, the ALJ reached step four and made a determination of Mrs. Kobyluck's residual functional capacity ("RFC"),2 concluding that Mrs. Kobyluck could "perform the full range of light work as defined in 20 CFR 404.1567(b) except she must avoid heights, scaffolding, ladders, and temperature extremes based on multiple sclerosis." (Tr. 28.)

The Appeals Council declined to review the decision. (Tr. 1-3.) Mrs. Kobyluck filed the complaint underlying this action on June 20, 2016, seeking this Court's review of the ALJ's denial of benefits. (Doc. 2.) The matter is now fully briefed before this Court. (Docs. 21, 22.)

DISCUSSION

I. Standard of Review

A reviewing federal court need only address the issues raised by the claimant in the appeal from the ALJ's decision. See Lewis v. Apfel, 236 F.3d 503, 517 n.13 (9th Cir. 2001). A federal court may set aside a denial of disability benefits only if that denial is either unsupported by substantial evidence or based on legal error. Thomas v. Barnhart, 278 F.3d 947, 954 (9th Cir. 2002). Substantial evidence is "more than a scintilla but less than a preponderance." Id. (quotation omitted). "Substantial evidence is relevant evidence which, considering the record as a whole, a reasonable person might accept as adequate to support a conclusion." Id. (quotation omitted).

The ALJ is responsible for resolving conflicts in testimony, determining credibility, and resolving ambiguities. Andrews v. Shalala, 53 F.3d 1035, 1039 (9th Cir. 1995). "When the evidence before the ALJ is subject to more than one rational interpretation, we must defer to the ALJ's conclusion." Batson v. Comm'r of Soc. Sec. Admin., 359 F.3d 1190, 1198 (9th Cir. 2004). This is so because "[t]he [ALJ] and not the reviewing court must resolve conflicts in evidence, and if the evidence can support either outcome, the court may not substitute its judgment for that of the ALJ." Matney v. Sullivan, 981 F.2d 1016, 1019 (9th Cir. 1992) (citations omitted). However, the Court "must consider the entire record as a whole and may not affirm simply by isolating a `specific quantum of supporting evidence.'" Id. (citing Hammock v. Bowen, 879 F.2d 498, 501 (9th Cir. 1989)). Nor may the Court "affirm the ALJ's . . . decision based on evidence that the ALJ did not discuss." Connett v. Barnhart, 340 F.3d 871, 874 (9th Cir. 2003).

II. Analysis

A. The ALJ Erred in Finding Kobyluck's Neurocognitive Impairments to be Non-Severe

"At step two, the ALJ assesses whether the claimant has a medically severe impairment or combination of impairments that significantly limits his ability to do basic work activities." Webb v. Barnhart, 433 F.3d 683, 686 (9th Cir. 2005). This step is generally seen as a "de minimis screening device to dispose of groundless claims." Smolen v. Chater, 80 F.3d 1273, 1290 (9th Cir. 1996). Thus, an ALJ should only dismiss claims at this step "when his conclusion is `clearly established by medical evidence.'" Webb, 433 F.3d at 687 (quoting S.S.R. 85-28). Furthermore, during this stage, "the ALJ must consider the combined effect of all of the claimant's impairments on her ability to function, without regard to whether each alone was sufficiently severe." Smolen, 80 F.3d at 1290. At step two, the ALJ determined that the claimant had two severe impairments—multiple sclerosis and type II diabetes. Having determined that these conditions were severe, it was error for the ALJ to determine, at step two, that certain aspects of these impairments, already recognized as severe, were not severe.

Virtually all of those who provided medical care to the claimant determined that her cognitive deficits were secondary to her MS. (Tr. 80, 81, 100, 407, 424, 437.) They also concluded that her neuropathy was secondary to her diabetes. It was then error for the ALJ to divide the manifestations of the impairments and find at step two that certain of those manifestations were not severe while finding that the impairment itself was severe. See Smolen v. Chater, 80 F.3d 1273, 1290 (9th Cir. 1996) ("[T]he ALJ must consider the combined effect of all of the claimant's impairments on her ability to function, without regard to whether each alone was sufficiently severe."). Thus, the ALJ apparently did not consider the collective impact her neurocognitive impairments had in conjunction with her physical impairments that were caused by her MS in either making his assessment at step three or step four of his analysis. This led him to fail "to consider how the combination of those impairments affected [the claimant's] ability to do basic work activities," and thus resulted in error. Smolen, 80 F.3d at 1290.

Once it has been determined that an ALJ made an error during the review of a claimant's file, the next step is to determine whether the error was prejudicial. See Carmickle v. Comm'r, Soc. Sec. Admin., 533 F.3d 1155, 1162 (9th Cir. 2008). Dismissing a condition as non-severe is not a prejudicial error if the ALJ still considers the condition as a function limitation during his RFC determination.3 Burch v. Barnhart, 400 F.3d 676, 684 (9th Cir. 2005). There is no evidence that the ALJ considered Kobyluck's memory impairment to be a functional limitation in the case at hand; the only allusion to her memory loss during the RFC assessment was the ALJ's notation that Kobyluck "continued to relay memory loss" in December of 2013.4 (Tr. 29.) The ALJ did not consider any limitations beyond Kobyluck's physical limitations during the formation of the RFC, and thus he committed prejudicial error. Burch, 400 F.3d at 684.

B. The Appropriate Remedy in this Case is Remand for Further Proceedings

The Ninth Circuit has set forth a three-part test to determine when it is appropriate to remand for benefits versus further administrative proceedings. First, a court must determine whether "the ALJ has failed to provide legally sufficient reasons for rejecting evidence, whether claimant testimony or medical opinion." Treichler v. Comm'r of Soc. Sec. Admin., 775 F.3d 1090, 1100-01 (9th Cir. 2014) (citation and quotation omitted). Second, the court must determine "whether the record has been fully developed, whether there are outstanding issues that must be resolved before a determination of disability can be made, and whether further administrative proceedings would be useful." Id. (citations and quotations omitted). Third, if the court "concludes[s] that no outstanding issues remain and further proceedings would not be useful, [the court] may . . . find[ ] the relevant testimony credible as a matter of law" and remand for benefits. Id. (citations and quotations omitted). When there are questions regarding the sufficiency of the record as a whole or an ALJ's reasoning, "the proper course, except in rare circumstances, is to remand to the agency for additional investigation or explanation." Gonzales v. Thomas, 547 U.S. 183, 185 (2006) (quotation omitted).

The ALJ erroneously dismissed Kobyluck's memory impairment as non-severe at step two. Therefore, the record has not been fully developed in this case.5 The remaining steps of the sequential analysis must be completed taking into account Kobyluck's memory impairment. The case is therefore remanded for further proceedings.

IT IS THEREFORE ORDERED that that Clerk of Court remand this action back to the ALJ for further proceedings and enter judgment accordingly.