In Thurber v. Aetna Life Ins. Co., the Second Circuit joined a majority of circuits in holding that an ERISA plan participant does not defeat the plan’s right to reimbursement under ERISA Section 502(a)(3) by spending or comingling funds from which the plan seeks reimbursement.

Section 502(a)(3) of ERISA provides for “appropriate equitable relief” to enforce ERISA plan terms requiring reimbursement, but courts have struggled to define the contours and requirements for such relief. Most cases grappling with this issue involve scenarios in which the plan pays disability benefits to a plan participant who later receives other disability benefits (such as SSDI) from a non-plan source, and the initial plan has provisions requiring reimbursement. In such cases, the plan participants have often spent the disability payments by the time they receive the third party payments. This situation can also arise when the plan pays medical benefits for injuries caused by a third party, and the individual later receives payment from that third party.

The First, Third, Sixth, and Seventh Circuits have all held that an ERISA plan is not required to demonstrate current, undifferentiated possession – i.e., that the money is segregated in a separate account — in order for the plan to have a right to recover the money under Section 502(a)(3). Conversely, the Eighth and Ninth Circuits have held that an ERISA plan cannot obtain reimbursement from the plan participant if he or she no longer possesses the funds – i.e., the plan participant spent the money by the time the plan tries to obtain reimbursement.

In Thurber, the plan participant argued that the plan could not obtain reimbursement of short-term disability payments because she had already spent the no-fault insurance recovery out of which the plan sought reimbursement. The participant also argued that the reimbursement sought was not a “particular fund” recovered from a third-party source, but was instead an overpayment “amount” resulting from the plan participant’s receipt of overpayments. The Second Circuit rejected both arguments, finding there need not be a “literal segregation” of the funds over which the plan seeks reimbursement, so long as the plan has identified the funds from which it seeks reimbursement. Furthermore, the court agreed with the majority that dissipation of the funds does not prevent the plan from obtaining reimbursement because the plan’s “equitable lien” over the funds attached as soon as the third-party recovery came into existence, and the funds were at that point in the participant’s possession.

The bottom line is that ERISA plan participants in most circuits act at their own peril if they ignore plan provisions requiring reimbursement, and they will not be able to spend the funds and later argue that their own actions defeated the plan’s claims. The issue posed by Thurber is likely to make its way to the Supreme Court at some point, given the circuit split, and the Court’s desire for uniformity in ERISA interpretation.