United States Supreme Court Precludes Invocation of ERISA to Obtain Reimbursement of Benefits

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The Employment and Labor Law Alert

January 25, 2002

In a 5-4 decision, on January 8, 2002, the United States Supreme Court struck a blow to employee welfare benefit plans created under the Employee Retirement Income Security Act (“ERISA”), by limiting the remedies available to such plans. In Great-West Life & Annuity Ins. Co. v. Knudson, __ U.S. ___, No. 99-1786, 2002 WL 15399 (Jan. 8, 2002), the Court decided that employee welfare benefit plans that have paid benefits on behalf of plan participants or beneficiaries may not invoke ERISA’s enforcement provision to bring an action against the beneficiaries or participants for reimbursement of those benefits, even when the plan participants or beneficiaries have recovered from a third party the monies paid on their behalf.

The dispute between Great-West and the Knudsons arose when Great-West sought reimbursement of medical expenses paid on behalf of Mrs. Knudson, who had health insurance through her then-husband’s employer, Earth Systems, Inc., after she was in a car accident. Earth Systems’ employee welfare benefit plan (“the Earth Systems Plan”) contained a reimbursement provision specifically identifying its right to recover from beneficiaries those payments which the beneficiaries are entitled to recover from a third party. The Earth Systems Plan stated that there was “a first lien upon any recovery, whether by settlement, judgment or otherwise,” obtained by a beneficiary from a third party in an amount not more than “the amount of benefits paid” or the amount the beneficiary received for medical treatment. The Earth Systems Plan also specifically imposed on beneficiaries personal liability for reimbursement. Through another agreement, Great-West, the Earth Systems Plan’s insurer, was assigned the rights to any claim for reimbursement.

After the Knudsons entered into a settlement of $650,000 with regard to the car accident, they devoted the bulk of the settlement to a trust and earmarked $13,828.70 for reimbursement to Great-West, placing the funds in the custody of the Knudsons’ counsel. Great-West had in fact paid out $411,157.11 for Mrs. Knudson’s medical expenses. Rather than accepting the earmarked funds, Great-West filed an action under ERISA seeking to enforce the Earth Systems Plan’s reimbursement provision. Both the United States District Court and the United States Court of Appeals for the Ninth Circuit limited Great-West’s right to reimbursement of $13,828.70, the portion of the settlement identified as attributable to past medical expenses.

On appeal, the United States Supreme Court considered whether ERISA’s enforcement provision, section 502(a)(3), permitted Great-West to obtain payment pursuant to the Earth Systems Plan’s reimbursement provision. Section 502(a)(3) authorizes civil actions relative to ERISA plans “by a participant, beneficiary or fiduciary (A) to enjoin any act or practice ? or (B) to obtain other appropriate equitable relief?” As the relief sought by Great-West – “the imposition of personal liability on respondents for a contractual obligation to pay money” – is not typically available as an equitable remedy, the Court held that actions against ERISA plan beneficiaries or participants for reimbursement of monies paid to or on behalf of beneficiaries or participants of ERISA plans may not be sought under section 502(a)(3). The Supreme Court concluded that the statutory language must be given its full effect, regardless of the potential for preclusion of any recourse to plans.

This dispute at its crux concerned what reimbursement is due Great-West under the Earth Systems Plan’s provisions. The Supreme Court did not address this issue, but rather, by considering the corollary question of whether ERISA permits Great-West to obtain relief, removed the dispute from federal jurisdiction altogether. The Supreme Court did, however, suggest that Great-West may have been successful in pursuing other legal avenues, such as intervening in the car accident litigation, asserting a state law breach of contract action, or seeking reimbursement from the Knudsons’ attorney or the trust into which the bulk of the settlement was placed.

In light of this decision, as a preliminary matter, entities which either sponsor or provide benefits for ERISA plans must review both their reimbursement provisions and applicable state laws regarding the viability of state actions for reimbursement (for example, state law actions by insurers are typically preempted by ERISA). Entities should further, at the beginning of employment and also prior to reimbursing participants or beneficiaries, enter into a contract with participants and/or beneficiaries requiring repayment of monies disbursed on their behalf. The far-reaching repercussions of the Supreme Court’s holdings, including how ERISA plan reimbursement provisions evolve, will continue to be analyzed in future Alerts.