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Important Ruling By U.S. Supreme Court: ERISA Plan Terms Govern In Reimbursement Case

April 24, 2013

By Susan Bahme Blumenfeld

The U.S. Supreme Court recently held that a fund could enforce a reimbursement provision, even where it seemed very unfair. In this case, a man was injured in a car accident and his fund paid his medical benefits. The man brought suit and recovered some monies from the other driver’s policy and some from his own insurance policy. The fund asked for repayment for the benefits it had paid – but that would leave the man with none of the monies he recovered.

If you are a trustee on a plan and you want to be able to recover some or all of the plan’s health expenses in the case of a recovery by a participant of some or all (or more than all) of the plan’s health care expenses, you should read this article to understand what steps you must take to ensure that your plan complies with the Court’s decision. This detailed explanation of the case discusses why the U.S. Supreme Court upheld the fund’s right to recover the monies.

On April 16, 2013, the U.S. Supreme Court issued its ruling in the US Airways v. McCutchen case. In its decision, the Court held that, in an action by a plan administrator for “appropriate equitable relief” under Section 502(a)(3) of the Employee Retirement Income Security Act of 1974 (ERISA) to enforce a plan’s reimbursement provision, equitable defenses, such as unjust enrichment, will not override clearly-articulated plan terms.

The facts in McCutchen are straightforward. James McCutchen was a participant in a self-funded medical plan established by his employer, US Airways. The plan paid $66,866 in medical expenses on Mr. McCutchen’s behalf for injuries he sustained in a car accident. Mr. McCutchen recovered a total of $110,000 ($10,000 from the responsible party’s insurance policy and $100,000 from his own policy), but this recovery did not compensate him for all of his accident-related injuries. After paying a 40% contingency fee to his attorneys, he received a balance of $66,000.

McCutchen refused to reimburse the plan, and the plan filed an action under Section 502(a)(3) of ERISA for “appropriate equitable relief. . . to enforce. . . the terms of the plan.” The plan sought reimbursement of the entire $66,866 it paid in medical expenses related to the accident, which was more than the participant recovered after deduction for attorneys’ fees. US Airways relied on a provision in its summary plan description requiring reimbursement by the participant “out of any monies recovered from [the] third party, including, but not limited to, [the participant’s] own insurance company as a result of judgment, settlement, or otherwise.” McCutchen countered US Airways’s claim for reimbursement with two equitable defenses: first, he asserted that US Airways was not entitled to reimbursement because he had recovered only a small portion of his total damages; and second, he claimed that US Airways had to contribute its fair share to the costs (attorneys’ fees) he incurred to obtain the recovery.

The District Court ruled in favor of US Airways on the grounds that the plan clearly and unambiguously provided for full reimbursement of all medical expenses paid by it on behalf of the participant. The Third Circuit subsequently vacated the District Court’s decision reasoning that, in an action for “appropriate equitable relief” under ERISA, the court must apply equitable doctrines and defenses, such as unjust enrichment, to avoid a “windfall” to US Airways given its failure to contribute to the cost of obtaining the recovery. The Supreme Court agreed to hear the case to resolve a split among the Circuit Courts on the issue of whether equitable defenses can override an ERISA plan’s clear and unambiguous reimbursement provision.

In vacating the Third Circuit’s decision, the Supreme Court focused on the importance of the terms of the written plan document. According to the Court, equitable defenses are “beside the point” when the parties “demand what they bargained for in a valid agreement.” Referring to its decision in Sereboff v. Mid Atlantic Medical Services, the Court stated that US Airways’s claim for reimbursement was an action to enforce an “equitable lien by agreement.” As stated by the Court, the agreement in this situation provides the measure of relief due to the parties, not general equitable principles such as “unjust enrichment.” The Court noted that its decision “reflects ERISA’s principal function: to ‘protect contractually defined benefits.’” By refusing to allow equitable defenses to override plain and unambiguous contract terms, the court keeps the plan document “at the center of ERISA.”

Unfortunately for US Airways, the Court determined that although the plan document clearly stated that it had first priority on the entire recovery for reimbursement of medical expenses paid on behalf of the participant (defeating the equitable “double-recovery doctrine” which would have given the participant first claim to the money to compensate him for his pain and suffering), the plan was silent on the issue of the plan’s contribution to attorneys’ fees. The Court held that in the absence of plain language in the plan document, a court can look to equitable principles to construe a plan’s terms. Because the US Airways plan document did not specifically disavow the common fund doctrine (the equitable principle allocating responsibility for fees among the parties who benefit from a “common fund”), the Court construed the plan to include this equitable provision for contribution to the costs of recovery.

One important note about the case: in a footnote, the Court mentioned that it based its decision on the language in the plan’s summary plan description (SPD), not the plan document. The Court stressed that the plan document controls the terms of a plan, and an SPD only communicates information about the plan to the participants. Because the parties did not raise this issue, the Court relied on the language in the SPD to determine the plan’s terms. Plan administrators should beware that a future court might rely on this language to refuse to allow the SPD language to control even in the absence of specific plan language.

Important takeaways:

  1. An ERISA plan’s provisions will prevail – make sure your plan’s terms are clear, complete and unambiguous.

  2. The plan should clearly provide that the plan has the right of first recovery on any monies obtained by the plan participant on account of injuries sustained.

  3. The plan should explicitly disavow equitable remedies including the make-whole, double-recovery and common fund doctrines.

  4. The plan should consider the extent to which it will agree in advance to contribute to attorneys’ fees in litigation by participants – and express this intention clearly in the plan document.

  5. The plan document, not just the SPD, should identify the plan’s subrogation and reimbursement policy.

If you need assistance, call the attorneys from the Willig, Williams and Davidson Employee Benefits Group who can review your summary plan description (SPD) for its reimbursement terms and answer any questions you may have regarding your employee benefits.

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