Published Articles

House of Representatives Amends ERISA

The confusing state of affairs with regard to what recourse an ERISA-covered Plan has with regard to subrogation and reimbursement rights may have just gotten simpler. As we know all too well, the United States Supreme Court handed down the decision on January 8, 2002 in Great-West Life Insurance & Annuity Company v. Knudson, which interpreted 29 U.S.C. § 1132(a)(3)(B)(ii) of ERISA, which sets forth the ability of an ERISA Plan fiduciary to pursue and enforce subrogation or reimbursement rights of the Plan. Section 1132 reads as follows:

“A civil action may be brought . . . by a . . . fiduciary to obtain other appropriate equitable relief . . . to enforce any provisions of this subchapter or the terms of the plan.”

The court held that a Plan could seek restitution in equity, ordinarily in the form of a constructive trust or an equitable lien, only when money or property identified as belonging in good conscience to the plaintiff could clearly be traced to particular funds or property in the defendant’s possession. It also went on to say that for restitution to lie in equity, the action generally must seek not to impose personal liability on the defendant, but rather, to restore to the plaintiff particular funds or property in the defendant’s possession. This confusing and illogical opinion has led to a split among the federal circuits as to how and when an ERISA Plan can subrogate or seek reimbursement. The Sixth Circuit and Ninth Circuit appear to prohibit any subrogation or reimbursement which purports to require the defendant/Plan beneficiary to reimburse the Plan, while other circuits have held that a Plan’s subrogation action is equitable, so long as the Plan beneficiary’s possession is an identifiable fund that came from the third party settlement and is traceable.

On November 28, the United States Supreme Court again decided to address the question of an ERISA Plan’s ability to get reimbursement from a participant who recovered a settlement from a third party. It announced that it would accept the appeal in the Fourth Circuit case of Sereboff v. Mid-Atlantic Medical Services. In that case, an ERISA Plan paid about $75,000 to Plan participant, Joel and Marlene Sereboff, for accident-related benefits. The Sereboffs then recovered $750,000 from the tortfeasors in settlement of a personal injury claim. The Plan then sued the Sereboffs to get reimbursed for the medical benefits it had paid. The Plan sued the Sereboffs under § 1132(a)(3)(B)(ii), which allows a Plan to recover “other equitable relief”. The Sereboffs defended on the ground that the Plan was seeking “legal” relief, which Knudson prohibited. The trial court held for the Plan, and the Fourth Circuit affirmed. In Knudson, the Plan money was paid to the Knudsons who put the money in a medical care trust. In Sereboff, the Plan paid the money directly to the Sereboffs who cashed the checks and placed the money in their investment accounts. The Fourth Circuit held that the Sereboff monies are specifically identifiable, belong in good conscience to the Plan, and are within the “possession and control” of the Sereboffs. It remains to be seen what the Supreme Court will do with this case.

Meanwhile, on December 15, 2005, House Republicans mustered a majority to pass H.R. 2830 (Pension Protection Act of 2005) after refusing to allow a vote on a Democratic alternative offered by Representatives Charles Rangel and George Miller. The Bill, sponsored by Representative John Boehner (R) of Ohio, includes § 307, entitled “Recovery by Reimbursement or Subrogation with Respect to Provided Benefits”. That section reads as follows:

(a) In general - Section 502(a) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1132(a)) is amended by adding, after and below paragraph (9), the following new sentence:

“Actions described under paragraph (3) include an action by a fiduciary for recovery of amounts on behalf of the plan enforcing terms of the plan that provide a right of recovery by reimbursement or subrogation with respect to benefits provided to or for a participant or beneficiary.”

(b) Effective date - Amendment made by Subsection (a) shall take effect on January 1, 2006.

The report of the Committee on Ways and Means indicates that the intent of this Amendment is to nullify “recent court decisions that have undermined the ability of health plans to recover costs paid out to participants that are awarded additional damages for the same claim”. The report indicates that H.R. 2830 is an attempt to clarify that health Plans and employers are able to enforce their routine reimbursement provisions with greater certainty.

The Bill has now been sent onto the Senate for approval. It is too early to tell how the Senate will respond, but all indications are that the Senate should rubberstamp the Bill, or pass the entire Bill with minor changes. Any changes included by the Senate will most likely not effect § 307, which is only a minor part of the entire Pension Protection Act of 2005.

Matthiesen, Wickert & Lehrer will keep a close eye on the status of this Bill as it moves through Congress. It is Matthiesen, Wickert & Lehrer’s opinion that if passed by the Senate, § 307 of the Act will have a profoundly positive affect on ERISA and health insurance subrogation. Although not worded perfectly, the legislative history makes clear that the House of Representatives intended to ameliorate the confusing effect of Knudson, and restore to health Plans the ability to enforce their subrogation and reimbursement Plan language. One possible negative side effect of § 307 is that, because the legislation specifically allows a Plan to enforce “terms of the plan” which provide a right of recovery by reimbursement or subrogation, it is entirely possible that the Act will be argued by plaintiffs’ counsel to have destroyed equitable subrogation rights - subrogation on the part of health Plans where they contain no subrogation or reimbursement language. Section 307 should remind health insurers to pay special attention to their subrogation and reimbursement language, as many subrogation cases live or die by the very language contained within the Plan.

Chapter 13 of our book, ERISA and Health Insurance Subrogation in All 50 States, reviews the nature of Plan language and gives suggestions for good language which will increase recoveries by insurance companies, third party adjusting firms, and health Plans. The book may be obtained through our website at www.mwl-law.com or our publisher’s website at www.jurispub.com the link below. Please contact Gary Wickert if you have any questions regarding the status of this new legislation or its affect on your subrogation program anywhere within North America.

Gary L. Wickert
Matthiesen, Wickert & Lehrer, S.C.
1111 E. Sumner Street
P.O. Box 270670
Hartford, WI 53027
(262) 673-7850 (Phone)
(262) 673-3766 (Fax)

gwickert@mwl-law.com
www.mwl-law.com