EBIA Weekly Newsletter

Plan’s Reimbursement in Third-Party Recovery Case Limited by Plan Terms and Common-Fund Doctrine

   April 14, 2016

US Airways, Inc. v. McCutchen, 2016 WL 1156778 (W.D. Pa. 2016)

After a plan participant was injured in a car accident and recovered money from third parties, the plan administrator sought reimbursement for $66,000 in plan-paid medical expenses relating to the accident. The case reached the U.S. Supreme Court, which held that the plan was entitled to reimbursement but noted that the “common-fund” doctrine may be taken into account in determining the reimbursement amount (see our Checkpoint article). (Under the common-fund doctrine, if a lawyer obtains a recovery that benefits parties other than the lawyer’s client, the lawyer is entitled to receive reasonable compensation from the recovery before payment to other parties.) The case was sent back to the trial court, which has now determined that the plan is entitled to reimbursement from only a small portion of the participant’s recovery, and that the reimbursement may be reduced by attorney’s fees.

The court first considered whether the formal plan document or the summary plan description (SPD) controlled because they each contained different subrogation and reimbursement provisions. While the SPD permitted reimbursement from various amounts, including those paid by a participant’s own insurance company, the plan document’s language provided only subrogation rights against third parties. (The Supreme Court did not decide which document controlled because the parties, until that point, had focused on the SPD.) The plan administrator asserted that a plan document provision referencing the SPD served to incorporate the SPD into the plan document, but the court found the relevant language insufficient for this purpose. The court also noted that the SPD specified that the formal plan document controlled in a conflict. Analyzing the applicable plan document provisions, the court concluded that the plan could recover from the $10,000 the participant received from the third party’s insurer, but not from the $100,000 he received from his own automobile insurer. And because the plan language did not expressly preclude application of the common-fund doctrine, the court held that the participant was entitled to reduce the plan’s reimbursement for attorney’s fees relating to the $10,000 recovery.

EBIA Comment: This case demonstrates the importance of ensuring that a plan’s subrogation and reimbursement provisions are clear and address all possibilities. Any SPD description of these provisions should be consistent with the terms in the plan document. Furthermore, terms in the SPD but not in the plan document might not be enforced by a court. Finally, keep in mind that the terms subrogation and reimbursement are not interchangeable—these are complex concepts, and experienced legal counsel should be involved in drafting plan provisions. For more information, see EBIA’s ERISA Compliance manual at Section XI.C (“Subrogation & Reimbursement: Legal Rules and Design Considerations”) and EBIA’s Self-Insured Health Plans manual at Section XXV.E (“Subrogation and Reimbursement: Legal Rules and Plan Language”).

Contributing Editors: EBIA Staff.