Supreme Court Declines To Review Decision Allowing Equitable Recoupment Of Benefit Overpayments

The U.S. Supreme Court has denied an ERISA plan beneficiary’s request to clarify whether an ERISA plan could enforce an equitable lien for benefit overpayments where the plan had not identified a fund that was in the possession and control of the plan participant at the time the plan asserted its lien. The High Court also denied a request to hear arguments on whether a plan fiduciary could review and make plan benefit decisions under a discretionary standard where that standard of review had not been disclosed to plan participants. The case is Thurber v. Aetna life Insurance Co. (Docket No.13-130).

Background. Sharon Thurber worked at Quest Diagnostics Inc. for 15 years before she became disabled from a car accident in 2007. She was enrolled in an ERISA-governed employee benefit plan at Quest that provided disability benefits, administered by Aetna Life Insurance Company. After the accident she applied for and was approved to receive short-term disability (STD) benefits which lasted for six months.

After those benefits ended, she applied for long-term disability (LTD). During the processing of the claim, Aetna learned that Thurber had received no-fault insurance payments of $1,202 per month while receiving STD benefits. Aetna denied her LTD claim, finding that she could still perform the job functions of her position. After exhausting her appeals, Thurber sued, challenging the denial of LTD benefits and arguing that the denial was erroneous, not based on record evidence, and failed to properly disclose how benefit decisions were made. In addition to its answer, Aetna filed for equitable restitution of over $7,000 from Thurber under a provision of ERISA and the plan, based on her receipt of no-fault insurance payments which, it argued, created an overpayment of plan benefits.

Lower court’s rulings. The trial court affirmed Aetna’s denial of LTD benefits, finding that Aetna’s claim decision fell within the “abuse of discretion” standard because no genuine issue of material fact existed that could render its decision arbitrary and capricious. The court also determined that ERISA imposed no requirement that discretionary standard of review be disclosed to participants, but, however, denied the claim for recoupment of benefits which the court saw as a legal rather than equitable remedy and thus not available under ERISA.

Second Circuit decision. The Second Circuit U.S. Court of Appeals affirmed the lower court’s ruling as to the claim and disclosure decision, but reversed its finding on the equitable restitution claim, finding that because Aetna had the right to reduce the insured’s short-term disability benefits at the time she received them, Aetna retained the right under its subrogation provision to compel return of the overpayments. The court also explained that the language in the plan put the insured on notice that any overpayments she received belonged to Aetna by virtue of an equitable lien by agreement. That she took immediate possession of the overpayments had no bearing on Aetna’s right to the property or on its ability to seek return of the overpayments. Thus, that court found that Aetna’s plan established an equitable lien by agreement, and its claim was for “appropriate equitable relief” under ERISA over which the trial court had jurisdiction. The court agreed with the lower court’s decision concerning disclosure, reasoning that a disclosure of the discretionary review standard was of no consequence to a plan participant.

Arguments for granting the petition. The insured’s petition for certiorari to the U.S Supreme Court was based on the questions of: (1) whether an ERISA plan could enforce an equitable lien where the plan had not identified a fund that was in the possession and control of the plan participant/beneficiary at the time the plan asserted its lien; and (2) whether a discretionary clause in a plan mandating an abuse of discretion standard could be enforceable when the presence of that standard was never disclosed in plan documents to plan beneficiaries.

In promoting her argument of not permitting restitution, the insured first observed that some federal circuits found such a remedy not available where the funds, as here, were dissipated, whereas other circuits ruled the remedy was available regardless of whether or not the funds were dissipated. Thus, with such a split of authority, adverse consequences were a likely result to national plans such as Aetna’s where results would depend on where the case was litigated.

As to the disclosure issue, the insured argued that such a ruling was at odds with ERISA’s general objective of full and meaningful disclosure of plan features and benefits and importantly, because a deferential standard of review effectively changed the substantive nature of the benefits to which an employee/participant was entitled, ERISA required plans to disclose such a change.

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