Subrogation and reimbursement in the aftermath of Knudson.(pension plans recovering of benefit payments rights)

The US Supreme Court's decision in Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002), dramatically--and adversely--affected the ability of the Employee Retirement Income Security Act of 1974 (ERISA) plans to enforce their rights of subrogation and reimbursement. These rights enable ERISA plans under certain circumstances to recover benefit payments made to participants and beneficiaries and are an important tool for conserving plan assets and maintaining the financial health of a plan. This article will discuss the Knudson decision, how, that decision has been interpreted by subsequent cases, and the extent to which alternative remedies are available.

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Prior to Knudson, a plan would generally enforce these rights by bringing a claim in federal court for restitution or unjust enrichment under ERISA Section 502(a)(3) as well as under the federal common law that has developed under ERISA. As a result of the Supreme Court's restrictive interpretation of ERISA Section 502(a)(3) in Knudson, a plan's ability to recover benefit overpayments under ERISA Section 502(a)(3) has been limited.

SUBROGATION AND REIMBURSEMENT PRIOR TO KNUDSON

In the context of welfare benefit plans, subrogation and reimbursement are different means to the same end--the recovery of benefit overpayments. Although the distinction between them is frequently glossed over and they are frequently referred to interchangeably, they are in fact very different remedies. Subrogation allows a plan to step into the shoes of a plan participant in order to assert a claim that the participant has against a third party. Reimbursement allows a plan to recover directly from the participant himself. While subrogation and reimbursement provisions are found in many ERISA benefit plans, most of the litigation in this area involves health and disability plans.

In the case of a health plan, subrogation and reimbursement are used to enable a plan to recover benefits that have been paid to cover medical expenses resulting from injuries sustained by a participant that are the fault of a third party. Subrogation allows the plan to step into the shoes of the participant in order to assert a claim against, and recover the benefits paid by the plan from, the third party responsible for the participant's injuries. The plan thus acquires the participant's rights against the third party so that if the participant elects not to bring an action against the third party, the plan can assert the same claims that the participant could have asserted against the third party.

A reimbursement provision, on the other hand, requires the participant to reimburse the plan for benefits the plan has paid for medical and other expenses incurred through the fault of a third party from any settlement, award, or judgment the participant obtains from or against the third party tortfeasor. In addition to the reimbursement requirement in the plan itself, the plan may also require the participant to sign a reimbursement agreement acknowledging the participant's obligation to reimburse the plan from any monies it receives from the third party.

Reimbursement provisions are also frequently found in disability benefit plans. Disability plans usually offset the disability benefits payable under the plan by any disability benefits received from another source, such as an award of disability benefits from the Social Security Administration (SSA). Because the process of applying for and obtaining Social Security disability benefits can be lengthy, disability plans will usually pay the full amount of benefits under the plan pending the SSA's decision. If the SSA awards benefits, the award will include benefits retroactive to the date of disability, which results in an overpayment of disability benefits under the disability plan. This overpayment can be recovered by the disability plan pursuant to the plan's reimbursement provisions as well as any reimbursement agreement entered into by the participant.

Prior to Knudson, an action to enforce a plan's subrogation or reimbursement provisions was generally brought in federal court pursuant to ERISA Section 502(a)(3), (1) which provides that a plan fiduciary may bring a civil action: (1) to enjoin any act or …