Supreme Court will decide whether strict tracing rule limits ERISA fiduciaries' ability to sue for recovery of benefit overpayments



April 01, 2015

Benefits Law Alert

Author(s): Charles M. Dyke

Can ERISA plan fiduciaries recover benefit overpayments from participants, regardless of whether participants already have spent the overpayment? Or does ERISA limit plans to pursuit of only specific funds that can be traced back to the plan? These are the questions at issue in a case the Supreme Court has just agreed to hear. The answers will have great practical consequence for employers and the benefit plans they sponsor.

The United States Supreme Court on March 30 agreed to hear an appeal in a case addressing the extent to which the Employee Retirement Income Security Act (ERISA) authorizes a health plan’s fiduciaries to sue a participant for repayment of previously paid medical benefits after the participant has recovered compensation from the third party who caused the participant’s injuries. The case is Montanile v. Board of Trustees of Nat’l Elevator Indus. Health Benefit Plan, No. 14-723, cert. granted 2015 WL 1400864 (S. Ct. Mar. 30, 2015). The U.S. Court of Appeals for the Eleventh Circuit, in line with the majority of circuits to have decided the issue, held that ERISA’s catchall remedy authorizing suits for “other appropriate equitable relief” includes suits for recovery of “overpaid” medical benefits, even when the participant no longer has in his possession the monies he recovered from the wrongdoer who injured him. The participant in this case is asking the high Court to adopt the minority view in the circuits and hold that strict tracing rules from equity apply in ERISA actions. Under this minority view, a plan fiduciary must identify the specific funds the participant recovered and then proceed only against those funds.

The circuit split arose after the Supreme Court decided Sereboff v. Mid Atl. Med. Servs., Inc., 547 U.S. 356 (2006). In Sereboff, the Supreme Court held that an ERISA plan could recover settlement proceeds from a beneficiary under the terms of the plan rather than under an equitable lien theory requiring strict tracing of the settlement funds into the beneficiary’s possession. The First, Second, Third, Sixth, Seventh and Eleventh Circuits interpret Sereboff to allow a fiduciary to assert an equitable lien even if the funds at issue cannot be strictly traced. The Ninth Circuit, in Bilyeu v. Morgan Stanley Long Term Disability Plan, 683 F.3d 1083 (2012), later followed by the Eighth Circuit, held that a fiduciary must be able to strictly trace the funds into the beneficiary’s possession. Both parties in the current case agreed that the Supreme Court should grant the appeal and decide the issue.

The resolution of this issue is important for both ERISA plans and their sponsors. If the decision follows the majority rule, ERISA plans in the Ninth Circuit will be able to enforce subrogation and reimbursement provisions to recover overpayments in far more cases, and participants and their attorneys will need to take into account the rights of ERISA plans when they decide whether to pursue litigation against or settle with those who caused the participants’ injuries. If the decision follows the minority rule, health plan fiduciaries will need to develop processes for learning quickly of participant recoveries against tortfeasors so that action can be taken to recoup overpaid benefits before the funds have been dissipated. Either way, employers will want to promptly conduct a legal review of their health plan language and overpayment-recovery policies when the case is decided so that appropriate modifications can be made to maximize the ability to recover.

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