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Supreme Court and Congress Weigh in on Plan Reimbursement Rights after Knudson

The travails of ERISA welfare plans seeking to enforce their subrogation and reimbursement provisions are in the news – again. We have already devoted two Benefits in Brief articles to the debacle resulting from the Supreme Court’s 2002 decision in Great-West Life & Annuity Ins. Co. v. Knudson, 1 but relief may be in sight. In the last two months, both the Supreme Court and Congress have initiated efforts to clear up the mess: the Court has agreed to resolve a dispute between the Circuit Courts of Appeals as to whether a plan may ever enforce its reimbursement provisions (even under the stringent test applied in circuits that permit recovery), and the House of Representatives has passed legislation that would end the crisis by amending ERISA to specifically authorize such suits. THE PROBLEM

The obstacle to a plan recovering under its subrogation and reimbursement provisions arises under ERISA itself but became a monster in Knudson. ERISA permits a plan only equitable relief, and such relief tends to be non-monetary – e.g., an injunction. The Supreme Court interpreted this rule in Knudson as a virtual ban on recovery. The Court’s rationale went something like this: because ERISA grants plans only equitable remedies, and because the imposition of a generic obligation to pay a fixed sum of money is a legal remedy, an ERISA plan cannot simply seek to recover the amount the participant owes: it can seek only the very same money it paid the participant.

In fact, the Court stopped short of saying that plans could ever recover, but suggested that they could if the funds at issue were specifically identifiable, belonged in good conscience to the plan, and were in the defendant’s possession or control (the Knudson facts). The Court left it to the lower courts to sort out whether satisfaction of these criteria would actually permit recovery.

Predictably, Knudson produced an immediate split among the circuit courts: the Fifth, Seventh, and Tenth Circuits held that a plan could recover under the Knudson facts, while the Sixth and Ninth Circuits held that all such reimbursement claims seek legal relief and are therefore impermissible under ERISA. The New Case: SEREBOFF V. MID ATLANTIC MEDICAL SERVICES, LLC.

By granting certiorari in Sereboff, the Supreme Court has agreed to resolve this post-Knudson split. The facts in Sereboff are typical of such cases. Mr. and Mrs. Sereboff were injured in an automobile accident, after which Mid Atlantic paid about $75,000 of their medical bills. When the Sereboffs received ten times that much in a personal injury settlement, Mid Atlantic demanded its $75,000, pursuant to the plan’s reimbursement and subrogation provisions. Relying on Knudson, the Sereboffs refused to pay.

When Mid Atlantic sued to enforce the plan’s terms, the district court, and later the Fourth Circuit, sided with the Fifth, Seventh, and Tenth Circuits, holding that reimbursement pursuant to the plan’s terms constituted equitable relief because the plan could prove the Knudson facts; i.e., the money belonged in good conscience to the plan (pursuant to the reimbursement provisions) and was both identifiable and in the Sereboffs’ possession and control (the funds they recovered in their tort action were still in their bank account).

Thus, the issue the Supreme Court has agreed to resolve is not whether plans should generally be able to enforce their own reimbursement provisions; rather, the Court will decide whether such relief is ever equitable (and therefore permissible), or whether ERISA plans are simply out of luck, even when the stars align and the plan can prove the Knudson facts. In other words, when the Supreme Court issues a decision in Sereboff, things will either stay rather bad for plans, or they will become very bad indeed. CONGRESS WEIGHS IN

As you may know, the U.S. House of Representatives recently passed the Pension Protection Act of 2005 (the Act). Most of the Act addresses the dismally underfunded state of defined benefit pension plans. One small passage in the 750-page bill, however, would erase the Knudson problem: Section 307 of the Act would append a single sentence to the relevant provision of ERISA, adding a claim for reimbursement to the list of actions authorized under the statute’s civil enforcement regime.

If this provision becomes law, the Knudson problem will simply go away. As long as the plan includes a reimbursement or subrogation requirement, the statute will specifically authorize the plan’s fiduciaries to bring the sort of action that plans have struggled to bring in the post-Knudson courts.

Unfortunately, the Senate version of the Act does not include a similar amendment to ERISA’s civil enforcement provisions. Thus, we will have to wait and see whether the provision in the House Bill survives the Conference Committee process. WHAT DOES THIS MEAN FOR PLAN FIDUCIARIES?

We are likely to know the fate of the House Bill before the Supreme Court hands down a decision in Sereboff. If the Act’s amendment to ERISA is signed into law, we will, of course, recommend that plan sponsors act immediately to ensure that their plans include the sort of reimbursement provision the new rule would require.

We also note that, while the Knudson problem usually arises under health plans (which typically contain reimbursement provisions), the language in the House Bill would apply equally to retirement plans (which typically do not). Assuming that the language is signed into law as is, we would advise plan sponsors to amend all of their ERISA plans to take advantage of the new recovery mechanism. (We note that the Eighth Circuit, in North American Coal v. Roth, has already held that an ERISA retirement plan can recover erroneous payments under the Knudson facts.)

Until then, we can only reiterate the advice we offered in August 2004 and again in February 2005: Follow the money. That is, the best way to ensure that your plan recovers pursuant to its reimbursement provisions is to actively track the litigation and settlement proceedings between your participant and the third-party tortfeasor. Maintain regular contact with the parties; know where the plan’s money is at all times; and when the time comes, sue the right person (i.e., the party in possession of identifiable funds that in good conscience belong to the plan, which might not be the participant).

However the Knudson cookie crumbles, it appears that we are finally wending our way to some sort of a resolution of this issue. Stay tuned. FOOTNOTE: 1- See You’ve Got to Be Kidding: Health Plan Reimbursement Rights After Knudson (August 2004 and Tenth Circuit Hands Down Health Plan Reimbursement Decision (February 2005).