The Supreme Court recently agreed to rule on a case that could limit the ability of plans to recover money under their reimbursement provisions. Employee benefit plans often cover the medical bills of participants, but require full reimbursement to the plan when those participants recover from third parties. Under ERISA § 502(a)(3), the plan fiduciaries may seek “appropriate equitable relief” from the court to enforce the reimbursement provision.

The issue before the Court is whether the reference to “appropriate equitable relief” allows a plan participant to raise traditional equitable doctrines as defenses to the plan’s claim for reimbursement, when those equitable defenses would negate the express language of the plan’s reimbursement provision.

In the case before the Court, US Airways, Inc. v. McCutchen, a plan participant was involved in a serious automobile accident that left him functionally disabled.  He received $66,866 from the plan to cover his medical expenses. He later recovered $110,000 from various auto insurance policies as a result of the accident.  After paying his attorney’s contingency fee, his net recovery was less than $66,000.  The plan demanded full reimbursement from McCutchen and his attorney, and brought suit under ERISA § 502(a)(3) when payment was not made.

The Third Circuit held that the equitable relief available to the plan under ERISA § 502(a)(3) was limited by traditional equitable principles. The court held that allowing the plan to obtain full reimbursement of the amounts paid would unjustly enrich the plan, as the reimbursement exceeded the amount ultimately recovered by the participant and constituted a windfall to the plan.

While the petition for Supreme Court review was pending in McCutchen, the Ninth Circuit in CGI Tech. and Solutions v. Rose followed that case and held that traditional equitable principles limited the relief available to plan fiduciaries.  The Ninth Circuit went even further than the court in McCutchen, holding that equitable principles applied despite explicit plan language that rejected equitable doctrines such as the make-whole doctrine and the common fund doctrine.

Prior to the McCutchen and CGI decisions, five other Circuit Courts enforced subrogation and reimbursement provisions in plan documents and refused to apply traditional equitable doctrines. Instead, these courts found that one of ERISA’s primary objectives was to ensure the integrity of written plans, regardless of equitable defenses to the contrary.

Next Steps: A decision in McCutchen should come down after the beginning of the year.  Plan sponsors should watch carefully, as the Court’s decision may require revisions to plan language regarding reimbursement and subrogation.