TAKING BENEFITS BACK: REIMBURSEMENT UNDER ERISA

Wal-mart’s lawsuit was called a reimbursement action. It involved seeking a return of employee benefits paid out and then allegedly recovered from a third party. In Ms. Shank’s case she did not obtain a full recovery but that did not matter to Wal-mart. It wanted the first dollar of the recovery, even though the recovery was not enough to pay for the loss of wages that Ms. Shank’s experienced and would experience in the future.  These actions typically arise under the federal statute known as the Employee Retirement Income Security Act of 1974 (ERISA).

Almost all employee benefit policies (which are called plans) will have reimbursement provisions in them.  These plans usually involve health insurance, short term disability benefits, long term disability benefits, and life and/or accidental death dismemberment benefits.  Reimbursement provisions in an employee benefit plan typically require that if the employee or dependant receives payment from other sources for which benefits have been paid, then the benefits must be repaid to the plan even if there is not a full recovery. Sometimes the plan also requires the claimant to apply for the benefits under threat of termination of the plan benefit. Some unfair circumstances can develop.

For example, a person receiving a long term disability benefit, which may only pay 60% of the claimants working wage, will often be required to apply for Social Security Disability benefits. When the Social Security benefit is received the claimant’s benefit is retroactively reduced to a much lower benefit – sometimes only $100 per month. This is followed with a demand for the claimant to pay back all the money just received by the Social Security Administration.

In years past the common law “make whole” rule required that until the participant or beneficiary was made whole he or she did not have to pay back or reimburse the insurance company or plan. This rule is still the default rule in the 11^th Circuit, but it can be bypassed. In fact plans began to include language to prevent application of the “made whole” rule.  The provisions require that the plan was entitled to receive back all benefits paid before the injured plan participants received a penny irrespective of the “made whole” rule.  The fairness of such provisions has been debated for some time.  Employees argue that premiums were paid and value should be received.  They further argue that the reimbursement provisions often turn benefits into an illusory form of coverage.  On the other hand insurers argue they are only trying to keep costs down for everyone.

I.   Does ERISA govern the plan?

The first step in evaluating a reimbursement of benefits issue is to determine whether the matter is governed by ERISA. When ERISA governs it preempts state law. Otherwise state law on subrogation will control. Principally, five elements must be established before ERISA governs a plan or policy benefit:

1.    There must be a plan, fund, or program;

2.    It must be established or maintained;

3.    This must be done by an employer engaged in interstate commerce or in an activity affecting interstate commerce;

4.    The purpose of the plan is to provide benefits;

5.    The recipients of the benefits are participants or their beneficiaries as defined by ERISA

    According to the 11^th Circuit case Butero v. Royal Maccabees Life Insurance Company, a key factor is whether the employer established or maintained the plan.  The following forms of evidence are evaluated to determine this: 1) the employer’s representations and internally distributed documents; 2) the employer’s oral representations; 3) the employer’s establishment of a fund to pay benefits; 4) actual payment of benefits; 5) the employer’s deliberate failure to correct known perceptions of a plan existence; 6) the reasonable understanding of employee; and 7) the employers intent.

    Additionally, ERISA at 29 U.S.C. § 1003(b) also exempts from its authority government plans, church plans, plans maintained solely to comply with worker’s compensation, unemployment, or disability insurance laws, plans maintained for non-resident aliens, or excess benefit plans. Church plans may opt into ERISA so investigation as to whether that has occurred may also be necessary.

Finally there is a “safe harbor” to avoid ERISA. The Department of Labor, in exercising its authority to provide regulations to further the statutory purposes, has adopted a safe harbor regulation, which may be found at 29 C.F.R. § 2510.3-1(j).  This safe harbor excludes from ERISA's gambit certain group insurance policies. The safe harbor criteria are:

1.  No contributions are made by an employer or employee organization;

2.  Participation in the program is completely voluntary for employees or members;

3. The sole functions of the employer or employee organization with respect to the program are, without endorsing the program,  to permit the insurer to publicize the program to employees or members, to collect premiums through payroll deductions or dues checkoffs and to remit them to the insurer; and

4. The employer or employee organization receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs.

 If an employer fails to satisfy each and every one of these provisions, the safe harbor is closed, and the plan or policy is governed by ERISA. Again, in most instances benefit plans will fall under ERISA, but a good ERISA attorney will check to see if state law may govern.

II.     Look at the reimbursement language in the plan.

    The 11^th Circuit made clear, years ago in Cagle v. Bruner,  that unless the ERISA plan language clearly precludes the operation of the “make whole” doctrine, the “make whole” rule of federal common law will apply.  As will be seen below, this common thread of looking carefully at the plan language is critical in ERISA cases.  The 11^th Circuit applies the doctrine of contra proferentem to construe ambiguous or vague plan language against the drafter. After Cagle, one would think that every plan would clearly preclude application of the make whole doctrine but in practice a few plans still exist.  In any event, the analysis does not end here, even if the contractual provisions are absolutely clear. The next issue to be addressed is whether those contractual provisions may be enforceable in a lawsuit.

III.    Can the plan sue to recover?

    Because ERISA governs these plans it also determines who can sue to recover. ERISA only lets certain individuals or entities file suit to enforce its provisions. Generally only a participant, beneficiary, fiduciary, a state, or the Department of Labor may file suit.  An insurer must therefore be a fiduciary to file suit, but not every insurer will qualify.

Under 29 U.S.C. § 1002 (21)(A), a person is a fiduciary with respect to a plan if there is exercise of “any discretionary authority or discretionary control respecting management of such plan” ... or exercise of any “authority or controlled respecting management or disposition of its assets” ... or “discretionary authority or discretionary responsibility and the administration of such plan.” Typically, this will mean that an insurer paying benefits out of its own pocket and handling adjustment of the claim is a fiduciary.  However, fiduciaries and their responsibilities must be set forth in the plan in writing. Again, careful review of the plan is in order to make certain that the insurer does not disclaim or fail to claim its role as a fiduciary.

If the insurer is indeed a fiduciary, then ERISA allows only a limited form of redress: suit may be filed “to enjoin any act or practice which violates any provision of this title or the terms of the plan, or (b) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this title or the terms of the plan.”  In fact such claims are only heard in a federal district court according to ERISA § 502(e).  It provides that “...the District Courts of the United States shall have exclusive jurisdiction of civil actions under this title brought by … a participant, beneficiary, fiduciary or any person referred to in § 101(f).”  However, participants and beneficiaries suing for benefits may file suit in state court or federal court as the same code provision provides “State Courts of competent jurisdiction and District Courts of the United States shall have concurrent jurisdictions of actions under paragraphs (a)(1)(b).”

    The United States Supreme Court in Great West Life and Annuity Insurance Company v. Knudson found that a fiduciary may file suit, but not for legal relief.  The plan specifically contained a reimbursement provision which gave it a right to any recovery paid to the beneficiary by a third party.  The reimbursement provision also imposed personal liability on the participant or beneficiary if there was a failure to reimburse the plan after a recovery was obtained from a third party. In that case, the Knudsons had recovered $656,000 in a settlement against Hyundai and the amount of reimbursement sought by Great West was $411,000. The reimbursement action was invalid as it was a contract action that sought a legal rather than equitable remedy.

    The Supreme Court had reason to visit the ERISA reimbursement issue again in Sereboff v. Mid-Atlantic Medical Services, Inc. The Sereboffs recovered $750,000 from a tortfeasor, but refused to reimburse their health plan $75,000 in accident related medical bills.  The plan fiduciary filed suit and so the Sereboffs agreed to set aside the reimbursement amount of $75,000 pending a final court ruling.  The Supreme Court found that in Mid-Atlantic’s case it sought reimbursement from “specifically identifiable” funds which were in the possession and control of the Sereboffs. The Supreme Court emphasized that not only must an equitable remedy be sought, but that the basis for the claim must also be equitable. Again, careful attention to the plan language and familiarity with ERISA, may mean the difference between paying back benefits or not.

IV.    Can the insurer retaliate in another manner?

    Some plans contain a provision allowing the insurer to terminate further coverage in the event that the participant or beneficiary does not cooperate in reimbursing the benefits paid.  Some have provisions allowing future benefits to be offset until full repayment has occurred. Many participants and beneficiaries may be placed in dire financial straits if they are in the midst of a health crisis and benefits are terminated or offset.  While this article will not undertake to analyze such instances, some claimants may be without needed coverage until after appeals with the company are exhausted, suit is filed, and litigation is resolved.  It is therefore incumbent upon counsel to disclose the risks involved and the potential for retaliation.

The plan may also be amended to specifically exclude coverage for the employee or client’s ailment.  ERISA does not provide any substantive rights to health or welfare benefits.  The Supreme Court in Curtiss-Wright Corp. v. Schoonejongen, has stated that plan sponsors "are generally free under ERISA, for any reason at any time, to adopt, modify, or terminate welfare plans." No cognizable claim will result if the plan sponosr decides to remove from its coverage the very ailment your client suffers from.  The only challenge that may be made is as to the procedure followed in amending the plan.

In the unpublished opinon,  Chaudhry v. Neighborhood Health Partnership Inc the 11^th Circuit conceded that a claimant’s benefits could be reduced or restricted and that such was not an impermissbile form of retalitation. Chaudhry had previously obtained a ruling in her favor regarding the provision of plan benefits for ongoing and necessary medical treatment. The plan’s response was to amend the plan to cut back such benefits.  Retaliation was permissible here.
V.     Conclusion – Solutions to Unfairness?

    Employees need to carefully review their plan and note the unfair provisions in advance of problems. If enough employees object to their employer’s use of certain insurance provisions or plans perhaps changes can be forced. Sometimes the cost of the change is negligible.  However often there are few options or there is not awareness by employees or employers as to the unfair provisions which are hidden in the policy.

It is possible for state law to be changed to address that issue. A state statute that is “specifically directed toward” the insurance industry is not preempted by ERISA.  The ERISA savings clause found at 29 U.S.C. § 1144(b)(2)(A) does not preempt state laws specifically directed toward insurance agencies. There may be room for states to control some of the issues arising in reimbursement claims.  Again it will take a groundswell of support for such issues for legislators to be moved to change.

For most, the unfairness of the “overpayment” problem will not be known in advance and that is exactly what insurers are counting on. The best advice is to obtain an ERISA attorney at the first hint of trouble.