In Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006), the U.S. Supreme Court held that an ERISA plan could recover settlement proceeds from a beneficiary under the terms of the plan rather than under an equitable lien theory requiring “strict tracing” of the settlement funds into the beneficiary’s possession. Previously, other courts, including the Ninth Circuit, read the Supreme Court’s earlier holding in Great-West v. Knudson, 534 U.S. 204 (2002), to bar ERISA plans from recovering money previously paid out to plan participants who subsequently recovered from the third parties who had caused their injuries. The Supreme Court in Sereboff however held that the ERISA plan at issue could request reimbursement of the benefits paid as a result of the accident pursuant to a reimbursement provision in the plan.
The Sereboff decision contrasts with Knudson which concluded that, because the lawsuit recovery was paid to various entities other than the beneficiary (including a special needs trust), the kind of relief that Great-West sought from the beneficiary was not traceable and therefore unavailable. This “strict tracing” rule from Knudson effectively shut out ERISA plans from recovering from beneficiaries where the settlement monies were dispersed.
While Sereboff did not explicitly overrule Knudson, the Sereboff decision effectively overruled most of Knudson, in that post-Sereboff a plan administrator or ERISA fiduciary can recover money from a beneficiary to enforce the terms of the plan even without being able to strictly trace identifiable funds into the beneficiary’s possession.
A cascade of circuit courts—the First, Second, Third, Sixth, Seventh and Eighth Circuits—have interpreted Sereboff to hold that a fiduciary can assert an equitable lien even if the funds at issue cannot be strictly traced. But the Ninth Circuit stands apart; in Bilyeu v. Morgan Stanley Long Term Disability Plan, 683 F. 3d 1083 (2012), the Ninth Circuit held that a fiduciary must be able to strictly trace the funds into the beneficiary’s possession. Last year the U.S. Supreme Court declined to review Bilyeu and resolve the circuit split regarding strict tracing. In addition, the Second Circuit has recently disagreed with the Ninth Circuit’s holding in Bilyeu. See Thurber v. Aetna Life Ins. Co., 712 F.3d 654, 664 (2d Cir. 2013).
Thus, for most of the country, if an ERISA plan’s terms allow for reimbursement from a beneficiary, the likely outcome in most cases will be that the recovery will be permitted, even if the funds cannot be strictly traced. However, ERISA plan sponsors and insurers in the Ninth Circuit must be prepared to face a higher hurdle when attempting to recover funds from a beneficiary. Attorneys should carefully review the terms of the relevant ERISA plan documents to ensure that the plan actually allows the recovery sought by the ERISA plan sponsor and insurer.