The Supreme Court of the United States recently issued a unanimous decision in Sereboff v. Mid-Atlantic Medical Services, clarifying the circumstances under which Employee Retirement Income Security Act (ERISA) fiduciaries may pursue equitable remedies on behalf of ERISA health care and other welfare plans. In Sereboff, the Court held that where an ERISA health plan included appropriate subrogation and reimbursement rights, the plan fiduciary could recover funds that a plan beneficiary received from an injury-causing third party that were in the beneficiary’s possession. ERISA health care and other welfare plans now have greater opportunities to reduce their costs and recover amounts from plan beneficiaries that receive these funds.
The Problem—Enforcing Subrogation and Reimbursement Rights
Most ERISA health plans include subrogation and reimbursement rights. Subrogation rights permit the ERISA plan to “stand in the shoes” of the plan beneficiary and file suit directly against the injury-causing third party to recover damages incurred by the beneficiary and paid by the plan. This right is rarely invoked and is used only when a plan beneficiary fails to take legal action against the third party. In contrast, a right of reimbursement is contractual and obligates a plan beneficiary to reimburse an ERISA plan when it pays for an injured beneficiary’s medical expenses who later recovers funds from the injury-causing third party. Under a right of reimbursement, the ERISA plan does not have to sue directly but may rely on the plan beneficiary’s goodwill to reimburse the funds.
Despite the existence of subrogation and reimbursement provisions, it has been difficult for ERISA plans to enforce these provisions. If a plan beneficiary recovers funds from a third-party but refuses to honor the plan’s right of reimbursement (memorialized in the plan’s documents and summary plan description), the plan fiduciary has an obligation to sue the beneficiary. The dilemma is that ERISA only permits the plan fiduciary to seek “appropriate equitable relief” from a plan beneficiary, and the courts have treated certain recovery efforts as actions for equitable relief. For example, in 2002 the Supreme Court held in Great West Life & Annuity Ins. Co. v. Knudson that an ERISA plan was not entitled to recover funds the plan beneficiary received from an injury-causing third party. In this case, the funds were held by a special needs trust rather than by the plan beneficiary directly. The Court concluded that Great-West’s lawsuit was a legal action, not an equitable one.
Subsequent to the decision in Great-West, some court decisions in this area have been inconsistent. Some federal appellate courts permitted ERISA plans to sue plan beneficiaries and impose a constructive trust or an equitable lien on recovered funds within the beneficiary’s control. Other appellate courts reached the opposite conclusion, refusing to recognize the constructive trust or equitable lien approaches as equitable remedies. In Sereboff the Supreme Court has finally put the issue to rest. Now it is clear when an ERISA plan can successfully use the constructive trust or equitable lien approach to enforce subrogation and reimbursement rights.
A Solution—The Sereboff Decision
In Sereboff an ERISA plan beneficiary was injured, received benefits from the plan, and then recovered a settlement from the injury-causing third party. Under the plan’s governing documents, the beneficiary was required to reimburse the plan in these circumstances, and the plan fiduciary sued to enforce the plan’s reimbursement provision.
The Court determined the relief the fiduciary sought was equitable because the plan sought recovery of funds from the injury-causing third party that were in the beneficiary’s possession. The Court distinguished the decision from that in Great-West because in Sereboff the beneficiary controlled the funds received from the third party. The Court also determined the plan’s reimbursement provision created an equitable lien by agreement, a remedy traditionally enforceable in equity. Also noting what it believed amounted to an equitable lien by agreement, the Court stressed that the plan provision specifically identified a particular fund, and a particular share of that fund, to which the plan was entitled. It clarified that an equitable lien by agreement was enforceable without regard to the plan’s ability to trace specific payments to funds in the beneficiary’s possession. Finally, the Court rejected the beneficiary’s attempt to assert equitable defenses and noted these arguments had not been raised in the lower courts.
Implications for ERISA Plans
The Sereboff decision eliminates the inconsistency that existed after Great-West. In effect, Sereboff offers plan fiduciaries a roadmap for how to draft and successfully enforce subrogation and reimbursement provisions in ERISA health and welfare plans. To improve their chances, plan sponsors should consider the following actions:
- Ensure plan provisions unambiguously explain the equitable remedies available to the plan administrator/fiduciary and specifically identify the funds and the share of the funds to which the plan is entitled when a beneficiary receives funds from an injury-causing third party
- Ensure plan provisions explicitly establish, as a condition of participation, an agreement under which a beneficiary commits to reimburse the plan if the beneficiary receives funds from a third party related to an injury for which plan benefits were paid, and ensure plan provisions exclude equitable defenses
- Ensure the plan fiduciaries have appropriate discretion to decide claims
- Clearly delineate the plan’s first right of reimbursement regardless of the settlement or classification of money received from an injury caused by a third party
- Ensure administrative procedures are implemented to enforce plan provisions (including procedures that identify injuries caused by third parties), establish equitable liens, require beneficiaries to keep the plan administrator informed of funds recovered from third parties, and initiate legal proceedings seeking appropriate equitable relief when beneficiaries refuse to cooperate with the plan provisions
In light of the Sereboff decision, all ERISA health and welfare plan sponsors should review and update the subrogation and reimbursement provisions in their plan documents, summary plan descriptions and employee communications.
McDermott’s employee benefits lawyers can answer questions regarding the Sereboff decision, review the efficacy of the subrogation and reimbursement provisions in an ERISA health care and other welfare plan, and improve administrative procedures for enforcing these provisions.