ERISA Subrogation and Reimbursement

Being approved for disability benefits can be a challenging process, whether you are seeking long-term disability (LTD) benefits through work or Social Security disability benefits.  For many people, seeking LTD benefits first makes sense, particularly because qualifying for Social Security can be a lengthy process.  

One of the concerns that may arise with seeking both LTD and Social Security benefits is that if you are approved for government benefits, you may be required to pay back the insurance company for the money that you received in LTD. 

ERISA subrogation and reimbursement can be confusing, particularly to those who have fought to get the benefits that they currently have. Working with a seasoned Philadelphia disability benefits attorney can help you understand the process better — and demonstrate that under current law, reimbursement can be challenged.

What Is ERISA?

The Employee Retirement Income Security Act of 1974, commonly known as ERISA, is a federal law that governs retirement, health, life and disability benefits for Americans. This law sets minimal standards for most pensions and health plans in the private industry. The purpose of ERISA is to protect individuals who are enrolled in these voluntarily-established plans.

Disputes over benefits, including disability benefits, often fall under ERISA. Many employers provide plans containing provisions that allow insurance companies to recover benefits that have been overpaid or that were paid for expenses that were later paid for by another party. This is known as subrogation or reimbursement, and is generally permissible under ERISA. 

For example, if a person is injured in a car accident, their group health insurance company may pay for their medical treatment.  If that same person wins a lawsuit against the driver responsible for the crash, then the insurance company will have a right of reimbursement.  In this situation, the injured person will likely be required to pay a portion of their settlement or award to the insurance company to cover their medical expenses. 

When Does ERISA Subrogation and Reimbursement Apply?

The first step in determining whether an individual may be required to reimburse their long-term disability plan is analyzing whether the claim falls under ERISA. This law applies in most cases involving benefits provided by an employer. There are a few exceptions, such as for governmental plans and church plans.

If a person is injured or becomes disabled, then an insurance company can seek to recover the money paid out if that person obtains a settlement or award from a third party.  If the plan is governed by ERISA, then the claim will be governed by the rules applicable to ERISA. While a plan can generally seek to recover its expenses via a subrogation claim, the Supreme Court recently set strict limits on these types of claims. 

Overpayment in Long-Term Disability Cases

Under the Social Security Act (SSA), 42 U.S.C. §407, the recovery of disability benefits from a person who was previously paid long-term disability benefits should be barred. In 2016, the Supreme Court significantly restricted ERISA plans’ reimbursement rights in Montanile v. Board of Treasurers of National Elevator Industry Health Benefit Plan, making it far more difficult for ERISA plans to recover benefits in LTD cases.

In the case, Robert Montanile was hurt in a car accident; his healthcare plan, which was subject to ERISA, paid his healthcare expenses.  The total medical bills were $121,044. As a condition of accepting benefits, Mr. Montanile had agreed that if he recovered any compensation from another party, he would reimburse the plan for benefits paid.  Under prior Supreme Court case law, this would create an equitable lien in favor of the plan if Mr. Montanile received a judgment or settlement for medical expenses that had been paid by the plan.

Mr. Montanile ultimately won a $500,000 settlement, and the plan sought reimbursement from the $240,000 remaining after costs and fees. Settlement discussions did not resolve the issue. The plan failed to respond when Mr. Montanile’s attorneys requested that it respond within 14 days, and so the funds were distributed to Mr. Montanile. Six months later, the plan sued for “appropriate equitable relief” under ERISA. Mr. Montanile argued that he had spent almost all of the settlement.  At the trial court level, Mr. Montanile lost, and the case was appealed to the Supreme Court.

In an 8-1 decision, the Supreme Court found that an ERISA plan’s right to “appropriate equitable relief” did not extend to an individual’s general assets.  Instead, a plan could only recover against funds related to the settlement. In essence, because the plan delayed in pursuing a claim until after Mr. Montanile had spent the settlement money, its right to reimbursement was limited. The Supreme Court did note that there is a distinction between traceable assets (such as a car or a house) and assets that could not be traced, like using the funds for past due bills.

The Montanile decision has significantly changed the ability of insurance plans to recover LTD benefits.  Unlike with awards or settlements for accidents, people receiving LTD payments tend to use them to pay their daily living expenses.  Recipients of these benefits are generally unable to work, and so these funds are dissipated as they are received.

As a result, when Social Security disability benefits are eventually granted, the insurance company cannot seek the specific benefits that it has paid, because they have been spent. Under Montanile, if the specifically-identifiable funds cannot be recovered, then the plan does not have a right to “appropriate equitable relief.”

The plan will also not be able to recover an individual’s Social Security benefits for several reasons.  First, this money is not the same as what the plan paid, so it has no right under Montanile to seek reimbursement.  Second, even if the plan were allowed to recover the Social Security benefits directly, because they are sent directly to the recipient, they could be spent before legal action is commenced.  Third, as noted above, under the Social Security Act, the recovery of an individual’s benefits should be barred.

As a result of the Montanile decision, it will be very difficult for a LTD plan governed by ERISA to recover benefits.  An insurance company may still seek reimbursement for their expenses, which is why it is important to retain an experienced Philadelphia disability benefits attorney to represent you.  

All of that said, there have been very few cases testing the bounds of when ERISA insurers can obtain reimbursement, and a few recent unpublished cases have not been favorable.  As a general rule, Montanile is not a “blank check” for beneficiaries who obtain recoveries that the insurer has a right to under the policy.  It simply limits the ability to recover when those funds have been disbursed.  

How a Philadelphia Disability Benefits Attorney Can Help

Many individuals come to our law firm at a low point in their lives — overwhelmed by a recent medical diagnosis, and scared about the future and the possibility of being unable to work. At Bross & Frankel, we are here to help. We will work with you both on long-term disability insurance benefits and Social Security disability benefits.

As Philadelphia disability benefits attorneys who have devoted our practice to this area of law, we understand how these two types of benefits interact. We will work with you to help you achieve the best outcome for your case. To learn more about how we can help you or to schedule a no-cost, no-obligation consultation, call our office today at (856) 795-8880, or contact us online.