Plan Document Updates May Be Needed After 'Montanile' Decision

ERISA expert discusses the significant implications of the Supreme Court’s decision in Montanile v. Board of Trustees, especially as it pertains to plan sponsors enforcing liens on retirement or health plan assets.

recent decision by the U.S. Supreme Court limits the ability of ERISA plans to seek equitable relief or reimbursement of payments from a third-party recovery by a participant—especially in cases where the money is not quickly and formally pursued by plan officials.

That’s the opinion of many respected industry commentators, including Nancy Ross, partner in Mayer Brown’s Chicago office and member of the firm’s Litigation & Dispute Resolution practice. Speaking with PLANSPONSOR, Ross warned that any advisory or consultant professionals working with retirement and/or health plans covered by the Employee Retirement Income Security Act (ERISA) “absolutely must take heed of this decision.”

For those unfamiliar with the case, the basic details are that a participant in an ERISA-covered health plan was hit by a drunk driver and subsequently recovered from said driver the cost of his related medical care—expenses initially paid up front by the ERISA health plan. As is often the case in such health plans (and retirement plans), a subrogation clause was in place that would normally have required the participant to repay the plan for his emergency medical expenses from the recovered assets. Long story short, the plan waited too long to ask the participant to repay the money, such that he had already apparently distributed the assets in question when the plan sued to enforce a lien on the assets—thereby pushing the recovery sought by the employer outside the realm of equitable relief and into the realm of legal damages, which ERISA does not allow.

“Frankly the industry’s reaction so far has been somewhat blasé about this case, but I think that is a real mistake,” Ross explains. “There is a lot to think about coming out of this decision, from potential changes, to summary plan descriptions and other formal plan documents, to reassessment of monitoring processes around third-party legal actions in which plan participants are involved and in which recoverable plan assets may be at stake.”

NEXT: SCOTUS seeks to limit relief under ERISA

PS: So, how do you take what SCOTUS said in this? Is it fair to say it limits the ability of ERISA plans to seek equitable or reimbursement of payments from a third-party recovery?

NR: The opinion is very consistent with the court’s previous efforts to contain the definition of equitable relief under ERISA. If you peel away the circumstances in this case and just take the legal issues at hand—it’s really about whether going after a dissipated trust or lien falls into the camp of legal damages, which ERISA does not allow.

What I surmise from all this is that, behind closed doors, the conservative justices agreed with the fact that, should they allow the plan to go after the assets in this case, then they would also actually be setting the stage for dilution of plan sponsors’ and plan fiduciaries’ ability to protect themselves from parties seeking damages under ERISA. The majority of the conservative and liberal judges agreed this is not what ERISA is about, in other words.

Their line of thinking, I believe, is that there must have been a reason that Congress, in writing ERISA, limited the relief that one can seek under this particular law to equitable relief. Part of what the Supreme Court was wading into here was, did Congress use the word “equitable” as in the traditional courts of equity, or did they use the term in a more benign sense, as a synonym for “fair?”

This is of critical importance for ERISA plans—the implications are broad. One of the most important is that, in regards to the subrogation provisions in place within many plans (especially large, well-run plans), sponsors will have to be very vigilant and proactive in understanding where they may have the right or even the obligation to pursue recovery of plan assets under the subrogation clause, and where they don’t.

NEXT: Practical changes may be required 

PS: What general guidance do you have for the process of enforcing liens and assessing the question of equitable relief versus damages under ERISA? Acting quickly matters, right?

NR: Practically speaking, one implication here could be that plan sponsors will have to start getting liens against the attorney in a given case rather than the participant. That wouldn’t necessarily have helped the plan sponsor in this case because of errors they committed in not fielding communications from the participant and attorney in a timely manner, but that might be necessary moving forward. You probably would not have to evoke ERISA if you did this—plans can sue non-ERISA entities outside of ERISA, as it were. So there would then be, perhaps, an opportunity for the case to proceed like that under common law, which again is important from the damages versus equitable relief question.

Besides that, plans need to be vigilant in how they are making sure that participants recognize when they might owe recovered assets back to their ERISA plans. Participants must understand that if they recover assets from a third party to cover expenses that were actually paid by the ERISA plan, and there is an appropriate subrogation clause in place; the participant does in fact owe the money back to the plan. But that doesn’t mean the ERISA plan has an inalienable right to collect the assets. They only have a right to equitable relief in the form of clearly segregated monies that are clearly owed to the plan. They cannot collect from the general assets of a participant, as a result.

Also, plan fiduciaries need to be vigilant in administration. When are these situations arising? When does a plan have a possible third-party payer? The plan needs to monitor situations like this closely. It’s just what plan sponsors are looking for, I’m sure, more monitoring and litigation. It’s a little unfortunate from that perspective, yes. You could even imagine a runaway situation in which, if the plan is not vigilant in recouping money that may potentially be owed to the plan under plan terms, that in itself could be construed as a fiduciary breach.

NEXT: It’s a DC issue, too 

PS: Do you see the issue coming up a lot in ERISA retirement plans? Whether defined benefit or defined contribution, or both?

NR: One thing that is reassuring is that most participants are probably not in the vein of thinking, “How can I get around this subrogation clause and not repay the plan for money it spent on taking care of me?” So when the plan sponsor takes charge here, it will really reduce the chances of a serious problem arising. The sponsor and the participant can likely work together for a good resolution when the right processes and procedures are already in place.

The details in this case are particularly informative from that perspective. Frankly, this case never should have made it into court. The plan sponsor really dropped the ball and did not proactively pursue this money apparently until well after it was spent. What is worse is that the sponsor was warned well in advance by the participant’s attorney that the assets in question were going to be distributed unless the plan took action. The plan didn’t even respond here for some six months. It’s a critical error and a critical contributing factor to this decision.

I have been doing ERISA litigation for 30 years. In my view, it is just such a lasting problem: the negligence that can occur when running ERISA plans. It’s unfortunate because, like their more careful and successful peers, plan sponsors dragged into these cases are usually offering these plans out of an effort to be generous and provide attractive benefits. It’s doubly unfortunate because these ERISA plans are so vital for the financial future of the participants.

If they do take good care of running their plans, it’s a clear win-win. Neither plans nor participants really want to be spending time and money and effort dragging each other into court over this stuff. Participants just want to get what they have been promised and what they feel they are owed. Of course, there are exceptions here, and that is especially unfortunate in the current content, but that’s not the way things generally go.

NEXT:  A few more thoughts 

PS: Are there other elements of this decision to consider, especially for DB and DC plans?

NR: Yes, certainly there are other implications in this case. Perhaps the most important, in skimming the opinion, you would naturally think that the court is protecting the participant here, but in many respects they’re also supplying protection to plans by keeping a narrow definition of equitable relief under ERISA.

The decision launches into a very traditional equitable relief versus legal damages analysis. It really seems to take the stance of wanting to prevent people from thinking of ERISA as predominately a tool to file lawsuits and seek damages in the district courts. If you study the actual statues being debated in this case, in 502(a)(2), when it talks about the relief available for breach of fiduciary duty, it includes language that says “and any other equitable or remedial relief the court deems appropriate.” Versus in 502(a)(3), it only says “equitable relief.” So, that is being interpreted to be meaningful. It supports the majority’s view that, when Congress said “equitable” in ERISA, it had a particular legal meaning in mind.

The last thing is, there are big implications here looking across basically all ERISA plans, from health plans to pension to defined contribution plans. Because of the way the court approached its decision, not limiting its analysis to the factual circumstances in which this case arose, you have an opinion that says, if the money is not kept segregated, you simply cannot recover it, even if the money should have remained segregated. 

You don’t have to go very far to find mistakes in plan calculations, whether in a DC or a DB plan. So, this has really big implications for our industry. It will be harder for plans to recoup overpayments. It’s not a narrow opinion.