The United States Supreme Court recently affirmed a plan fiduciary's right to enforce plan subrogation and reimbursement provisions against plan participants who take possession of funds recovered from third parties. In Sereboff v. Mid Atlantic Medical Services, Inc., the company sponsored a health plan that provided coverage to Mrs. Sereboff and her husband. The Sereboffs were injured in a car accident, and the plan advanced payments for $74,900 in medical expenses. The plan contained an "Acts of Third Parties" clause under which it could recover payments made to participants by third parties for costs incurred as a result of an injury caused by third parties.
The company, through its third-party administrator, repeatedly informed the Sereboffs and their attorney of the subrogation claim. They asked the Sereboffs to sign a subrogation lien agreement acknowledging the plan's claim, but the Sereboffs refused. The company sued, and the court imposed an injunction resulting ultimately in the funds being set aside while the litigation was pending. The court later ordered the Sereboffs to turn over the funds to the company. The Sereboffs appealed all the way up to the Supreme Court.
The right of the plan administrator to assert a claim to the settlement funds in Sereboff was dependent on a prior decision of the United States Supreme Court in Great-West Life & Annuity Ins. Co. v. Knudson. In Great-West, the Supreme Court held that a plan's claim for restitution was not available under ERISA because the claim was made in terms of a participant's contractual obligation to pay money rather than equitable recovery of an identifiable fund. Applying this holding in the context of a plan fiduciary's attempt to enforce a plan's subrogation and reimbursement provisions, however, has proven to be rather difficult in the federal appellate courts. In fact, prior to the high court's decision in Sereboff, the federal appellate courts were split on whether such claims were permitted under ERISA. For instance, the United States Court of Appeals for the Sixth Circuit (covering federal courts located in Tennessee, Michigan, Ohio and Kentucky) previously held that a plan fiduciary could not bring an action under ERISA to enforce plan subrogation and reimbursement provisions while others recognized limited types of equitable claims that could be used to enforce such provisions.
In Sereboff, the Supreme Court determined that, under certain conditions, a plan fiduciary could assert a claim under ERISA to obtain funds recovered by the plan participant or beneficiary from a third party. The Supreme Court explained that the company in the case was not seeking a money judgment but instead was seeking a constructive trust on the settlement funds. The company was able to identify a specific fund, apart from the Sereboff's other assets, on which a constructive trust could be placed.
This decision should prove very helpful for plans and their administrators. One important point of the opinion is that the Court rejected any "strict tracing" requirement with respect to the funds. However, plans must still be careful in how their subrogation and reimbursement clauses are worded. Plan administrators must also be vigilant in enforcing the plan's subrogation and reimbursement rights.
The Supreme Court also provided a roadmap or a description of the steps a plan fiduciary should take to increase the likelihood of success when trying to enforce a plan's subrogation and reimbursement provisions. First, ensure that the plan identifies recoveries from a third party as a source of repayment (that is, include separate subrogation and reimbursement provisions in the plan and summary plan description). Second, identify a particular fund, separate and apart from the participant's or beneficiary's general assets (that is, recoveries from third-parties). Third, identify a particular share of that fund to which the plan lays claim (that is, the amount of benefits paid by the plan). Following these steps should create an equitable lien or constructive trust over that specific portion of the funds recovered by the participant or beneficiary. Finally, the plan fiduciary should place the participant/beneficiary and/or her counsel or other agent on notice of its intent to seek recovery of these funds as soon as practicable.