Extra-judicial Contracts Sufficient to Recoup Benefit Overpayments

November 6, 2006 (PLANSPONSOR.com) - The 7th US Circuit Court of Appeals ruled that a plan administrator is not required by the Employee Retirement Income Security Act (ERISA) to go through the judicial process before it reduces or suspends plan participants' benefits in order to regain overpayments to a plan.

The appellate court rejected the argument by two General Motors’ employees that a US Supreme Court precedent says plan administrators may only use judicial remedies offered by the Employee Retirement Income Security Act (ERISA) to regain benefit overpayments, preventing them from using contractual agreements to do so, according to the court opinion.

The former GM employees said ERISA Section 502 “prohibits GM from invoking contractual remedies for reimbursement and instead requires GM to seek equitable relief before a court.” However, the court upheld the decision by the US District Court for the Southern District of Indiana, saying that ERISA does not bar the administrator from using extra-judicial contractual remedies, such as reducing or suspending benefits.

According to the opinion, “GM modified performance of its current payment obligations in accordance with a contractual provision entitling it to do so; this modification does not violate any aspect of ERISA that the plaintiffs have identified, nor does it violate a clearly articulated policy of ERISA.”

James Northcutt and Lewis Smith asked the court to force repayment of pension benefits that had been withheld from them by GM. GM withheld monthly benefits from the plaintiffs’ after learning of social security benefits they had received.

An agreement between the union and GM mandated that pension and disability benefit payments due to plan participants would be reduced by the amount equivalent to social security benefits. Further, if an employee received employer-sponsored benefits and later received social security benefits, the plan could demand reimbursement from the participants or withhold or suspend benefits in order to recoup the overpaid benefits.

Before Northcutt retired in 1997, he applied for monthly retirement benefits and an early retirement supplement through the employer-sponsored plan. He also signed an agreement that said he would reimburse his plan if he became eligible for a social security disability insurance benefit or an unreduced social security benefit before he turned age 62.

Northcutt received a retroactive lump-sum social security payment of $32,175, and GM contacted him in 2003 requesting reimbursement. However, Northcutt refused to pay GM, claiming that the award had been spent by the time his former employer made the reimbursement demand.

Smith took a disability leave of absence beginning in 1990 and began receiving benefits under GM’s disability plan. He was approved for a lump-sum social security disability payment, but when GM requested repayment of the plan benefits overpaid by retroactive reward, he also said the award had been dissipated.

For the full opinion go  here .