ERISA Plan Funding

Question
I attended one of your seminars but I cannot find my materials on the question below. With regard to the Plan funding arrangement on Form 5500, the company checked both (1)Insurance and (4) General assets of the sponsor. If the plan explicitly states it shall receive subrogation on a first priority basis do I have a leg to stand on in seeking a reduction?

Answer
I am glad to hear you attended one of our seminars and thank you for the question. As you will remember the Form 5500 can give you an indication as to how an ERISA plan is funded. The importance of funding status cannot be underestimated as the funding status will control whether we apply state or federal law. Based upon your inquiry it appears as though the plan uses insurance for certain benefits and self-funding for other benefits. The next step would be to check the Schedule A which accompanies the basic form. Schedule A should be filled out for each insurance policy that is used in the operation of the plan. Under line 7 of Schedule A it will indicate what type of policy you are dealing with. While the Form 5500 is a good indicator, these forms are not always accurate and they should be compared with any statements made in the Summary Plan Description.

Both insured Plans and self-funded Plans are both ERISA-covered. ERISA defines an employee welfare benefit plan as a plan, fund, or program; established or maintained; by an employer, an employee organization, or both through the purchase of insurance or otherwise, for the purpose of providing medical, surgical, or hospital care or benefits or benefits in the event of sickness, accident or disability, for its participants or their beneficiaries. The only exceptions are individual plans, government plans, and religious group plans. ERISA expressly preempts state laws insofar as they relate to employee benefit plans (29 U.S.C. 1144(a)). HOWEVER, under ERISA this preemption does not apply to those laws which regulate insurance, banking, or securities (29 USC 1144(b)(2)(A). This is known as the savings clause and if an ERISA plan is in fact insured you can use state law defenses. Unfortunately Ohio virtually mirrors the 6th Circuit and thus funding status may not be a major concern in your case.

The language that states that it shall “receive subrogation on a first priority basis” really does not mean much. First and foremost, plans often rightfully distinguish between subrogation and reimbursement. Second, under ERISA a plan must be seeking an equitable remedy. ERISA plans are limited to seeking appropriate equitable relief. 29 U.S.C. § 1132(a)(3)(B). An ERISA plan has a right of reimbursement which sounds in equity if the plan language imposes a constructive trust or equitable lien upon a third party recovery. To qualify as equitable the plan language MUST 1) specify that recovery will be made from an identifiable fund and 2) specify that recovery must be limited to a specific portion of said fund. If either of these requirements are not met in the plan language, the plan does not have an equitable right to recovery and thus they do not have a reimbursement interest under ERISA. See Sereboff, 126 S.Ct. 1869 (2006). Thus it is important to make sure the plan is seeking an equitable remedy. Finally, you would want to see if the plan addresses equitable defenses which may apply such as the made whole doctrine (insured made whole before plan allowed to recover) and the common fund doctrine (reduction for procurement costs).

In conclusion the entire subrogation/reimbursement provision(s) of a plan needs to be carefully evaluated to ascertain whether the plan in fact has a right and whether any defenses would bar or limit that right. Also the plan may have other weaknesses based upon the underlying tort or the allocation of settlement proceeds.

If you have a copy of that language I would be more than happy to give it a quick review. Thanks for the question and please let me know if you have any follow-ups.

My Best,
Michael D. Russell