The U.S. Supreme Court has held that plan fiduciaries can seek reimbursement from plan beneficiaries for medical expenses paid to cover injuries caused by third parties, if the beneficiaries recover damages from the third parties, so long as there are specifically identifiable funds in the possession and control of the beneficiaries.
The U.S. Supreme Court has held that plan fiduciaries can seek reimbursement from plan beneficiaries for medical expenses paid to cover injuries caused by third parties, if the beneficiaries recover damages from the third parties, so long as there are specifically identifiable funds in the possession and control of the beneficiaries. See Sereboff v. Mid Atlantic Medical Services, Inc. (May 15, 2006).
In Sereboff, a husband and wife were injured in an automobile accident. The health insurance plan sponsored by the wife's employer paid the couple's medical expenses. The health plan contained a reimbursement provision that required beneficiaries who received benefits from the plan for injuries caused by a third party to reimburse the plan from any amounts recovered from the third party. The couple sued several third parties seeking compensation for their injuries, and eventually settled their case for $750,000. Mid Atlantic, the company that administered the employer's plan, then sued the Sereboffs under § 502(a)(3) of ERISA, seeking to recover from the settlement amount the roughly $75,000 it had paid for the Sereboffs' medical expenses. The Sereboffs agreed to set the disputed amount aside in an investment account until the case could be decided.
After the lower courts ruled in favor of Mid Atlantic, the Supreme Court agreed to review the case in order to resolve a disagreement among the federal courts as to whether § 502(a)(3) permits a plan to seek reimbursement of expenses paid under these circumstances. The disagreement among the federal courts stemmed in part from a 2002 Supreme Court decision, Great-West Life & Annuity Ins. Co v. Knudson, in which the Court had ruled in a similar case that only equitable relief could be sought under § 502(a)(3), and that Great-West's suit for reimbursement of funds received from a third party was not equitable.
In this most recent decision, the Court explained that the reason Great-West's action was not equitable was because the funds received by the plan beneficiaries were not in their possession, but had been placed in a "Special Needs Trust." Because the funds were not in the possession of the beneficiaries, the relief Great-West sought was legal rather than equitable in nature: Great-West sought to impose personal liability on the plan beneficiaries rather than to impose a constructive trust on funds in their possession.
In the case against the Sereboffs, the Court held that because Mid Atlantic sought to recover "specifically identifiable funds" that were in the "possession and control of the Sereboffs," Mid Atlantic was seeking equitable relief, which was authorized under § 502(a)(3). However, the Court stated that both the nature of the relief sought, as well as the basis for the underlying claim, must be equitable in order to proceed under § 502(a)(3). Because the Sereboffs had agreed to reimburse the plan (by virtue of the reimbursement language contained in the plan document), the Court found the basis for Mid Atlantic's claim was also equitable, noting the familiar rule of equity that when a person agrees to convey an object he does not yet possess to another as soon as he acquires it, the person becomes a trustee as soon as he acquires title to the object and an equitable lien over the object is created.
Notably, the Court rejected the argument that in order to succeed with their claim, the plaintiffs have to be able to trace the settlement proceeds to some particular funds or assets, finding that the tracing rules do not apply to equitable liens that have been created by agreement of the parties. Also of note, the Court refused to address whether Mid Atlantic's ability to recover from the Sereboffs was limited by the "make whole" doctrine, under which recovery is permitted only if the injured party has been made whole for his injuries. The Court suggested that doctrine might be a defense to an action that could only be characterized as a claim for equitable subrogation, but that Mid Atlantic's claim could be characterized in other ways.
Employers' Bottom Line:
Employers with self-insured plans should ensure their plans contain both subrogation and reimbursement provisions that permit them to recover for expenses paid as a result of injuries caused by a third party. They should proactively monitor these situations and consider whether to actively participate in settlement discussions or litigation. If a beneficiary refuses to honor those provisions, a suit should be filed promptly while identifiable funds are still in the possession of the beneficiaries. Ford & Harrison's Employee Benefits attorneys can review your plan documents to ensure the appropriate language exists, and assist you in the event legal action is necessary to protect the rights of the plan.
If you have any questions regarding this decision or employee benefits generally, please contact Margaret Bernardin, firstname.lastname@example.org, (407) 418-4365, or any member of the Ford & Harrison Employee Benefits Group.