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U.S. Supreme Court OK's Reimbursement Rights for ERISA Medical Plans

In a recent decision, Sereboff v. Mid Atlantic Medical Services, Inc., the U.S. Supreme Court breathed new life into a group health plan's ability to obtain reimbursement from plan participants who recover damages from a third party.

Most employer health plans contain language, commonly referred to as a reimbursement or subrogation provision, allowing the plan to recover medical expenses it has paid to a participant who subsequently obtains a judgment from a third party who caused the participant's injury.

Under section 502(a)(3) of ERISA, a fiduciary can sue to obtain "appropriate equitable relief" to enforce the terms of a plan covered under ERISA. A lawsuit may be brought under this section only to seek a remedy that was available under a court of equity in the days when different courts sat as courts of equity or courts of law. Courts of equity generally dispensed remedies that did not involve monetary awards.

Four years ago, the Supreme Court, in Great-West Life & Annuity Insurance Company v. Knudson, ruled that a group health plan could not enforce a reimbursement provision under ERISA section 502(a)(3) because the plan was seeking monetary damages which is not "appropriate equitable relief." The Court's decision was based on the fact that the funds the participants had recovered from the third party were placed in a trust fund outside of the participant's possession and, therefore, the plan was actually suing the participants themselves.

After the Knudson decision, decisions of the federal appeals courts varied on the issue of whether any reimbursement action could be brought under ERISA and, if so, under what circumstances.

In the Sereboff case, a self-insured plan paid nearly $75,000 of medical expenses incurred by the Sereboffs after they were injured in a car accident. The Sereboffs then sued various third parties for damages relating to the accident and ultimately settled the litigation for $750,000. The plan sought to recover the $75,000 under the reimbursement provisions of the plan. The Sereboffs refused to reimburse the plan and instead put the money in investments controlled by them.

The Supreme Court did not expressly overrule the Knudson decision, but decided that the money damages sought by the plan constituted "appropriate equitable relief." Relying on a 1914 decision, the Court said that the reimbursement clause actually created a "fund" consisting of the amounts recovered from the third party, and that fund was distinct from the Sereboffs' personal assets. The Court said that the plan could follow the reimbursable portion of the fund into the Sereboffs' hands and impose a constructive trust or lien on those moneys. Since the plan was not suing the participants themselves (as in Knudson), but was instead suing to enforce the trust, the Court characterized the lawsuit as equitable in nature.

In the wake of the Sereboff decision, it should be easier for medical plans to recover expenses from participants who have obtained a third-party judgment. Plan sponsors should closely examine their medical plan documents to ensure that the documents contain appropriate reimbursement provisions allowing for recovery.