Plan fiduciaries have become more aggressive in their attempts to recover mistaken overpayments to retirees. The plan may elect to recoup the overpayments by reducing future pension payments, but what if the participant received a lump sum or the recoupment method will not work, for example,  because the retiree is elderly and the value of the future payments is not large, or because the payee wasn’t really entitled to any vested pension?

I have previously written about  obstacles  fiduciaries may face if requests for repayment have been ignored and they decide to sue to recover the overpayments. These included the statute of limitations, whether they failed to provide a process for challenging the amount or existence of the overpayment, and the possibility of equitable counterclaims that would prevent the fiduciaries from adjusting the payments.  Recent actions by the U.S. Supreme Court may make it even more difficult to prevail in a lawsuit to recover pension overpayments.

The Montanile Case

A retiree’s current assets should be available to repay the plan, right?  Well, maybe not.

The Supreme Court will be issuing a decision in Montanile v. Board of Trustees of the National Elevator Industry Health  Plan determining whether welfare plan fiduciaries seeking to recover overpayments must identify and trace the payments to specific assets in the possession of the plan participant.  In Montanile, the participant had been reimbursed for medical expenses by a plan, which then sought reimbursement out of the amount Montanile received in settlement of a suit for his injuries. Montanile  spent his settlement,  which he argued  defeated the plan’s claim.

Several federal courts of appeal do not require tracing in these recovery suits, but a minority do, so it will be significant if the Supreme Court upholds Montanile’s position. If it does, no recovery of overpayments would be available if the pension were regularly used to pay ordinary living expenses.  Stay tuned.

United Refining Company v. Cotillion

This is a case the Supreme Court declined to review. It’s also a minority interpretation, but one that could be equally troublesome for repayment lawsuits.  In Cotillion, the U.S. Court of Appeals for the Third Circuit reviewed a plan that failed to apply actuarial reductions to early pensions  of deferred vested participants.  The version of the plan in effect when plaintiffs retired did not have a specific provision providing for these reductions, but the actuaries said they were required.  The court ruled that the “new” interpretation of the plan requiring such reductions was a plan amendment, and that  ERISA and Section 411(d) of the Code prohibited its application to previously earned benefits.  The result?  Under this interpretation, the mistake could have to be followed permanently, and could adversely affect the plan’s funding.

At least in the Third Circuit, this is another potential trap for fiduciaries trying to recoup overpayments.  The court might possibly have reached a different result, however, if the plan had explicitly required the reductions but the administrator inadvertently failed to make them.

The Bottom Line

There is no hard and fast rule that fiduciaries are always  required to sue to recover overpayments. Fiduciaries  should be able to take factors such as hazards of litigation into account in agreeing to settlements of claims.  However, these cases illustrate why we should have more guidance from the agencies with ERISA jurisdiction, and perhaps from Congress,  on when and how fiduciaries may attempt to recover overpayments.