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:: Recoupment Of Overpayments May Violate ERISA Requirements

In addition, under Supreme Court and Sixth Circuit law, the recoupment of overpayments may be in and of itself a violation of ERISA, depending on the facts and circumstances of the case. Succinctly, such recovery is legal, not equitable relief, and is barred by ERISA. See, Buchanan v. Aetna Life Insurance, 2006 WL 1208069 (6th Cir.2006) (unpublished). In that case, plaintiff received SSDI funds (supplemental security disability income) in addition to his benefits from Aetna’s ERISA Plan. Aetna was entitled to be reimbursed for the overpayments according to the terms of the Plan. However, the law did not provide Aetna with a remedy. Bell v. Ameritech Sickness and Accident Disability Ben. Plan. Slip Copy, 2007 WL 1647887 E.D.Mich. (June 05, 2007)

Bell v, Ameritech involved a claim for benefits under a short term disability plan. The plaintiff, having been injured in an automobile accident, applied for and received disability benefits for a period of time. The administrator subsequently terminated her benefits and then further determined that the participant had been overpaid.

In discovery, the plaintiff sought information related to the payroll deductions taken from her paycheck to repay the plan. The defendants argued that this information was not a part of the administrative record and thus was not subject to discovery.

The Overpayment Recoupment Controversy

Whether plans may recover overpayments and, if so, in what manner, has been complicated by the Supreme Court rulings as to the scope of “appropriate equitable relief” under ERISA Section 501(a)(3). See, e.g., The Ongoing Conflict Between Protection Of SSD Awards And Recoupment of LTD Benefits

In this case, the district court recounted the Supreme Court’s holding in Knudson as follows:

In Knudson, the Supreme Court reasoned that while ERISA provides a participant, beneficiary, or fiduciary the opportunity to obtain an injunction or other equitable relief, the term “equitable relief” refers to the categories of relief typically available in equity. 534 U.S. at 209-210. The Court further explained that not all forms of restitution were available in equity and that “a plaintiff could seek restitution in equity.. where money or property identified as belonging in good conscience to the plaintiff could clearly be traced to particular funds or property in the defendant’s possession.” Id. at 213.

The district court, relying upon the Sixth Circuit’s decision in Buchanan v. Aetna Life Insurance, 2006 WL 1208069 (6th Cir.2006) (unpublished), took a narrow view of the relief available to the plan:

The Sixth Circuit in Buchanan continued: “The money Aetna claims it overpaid to Buchanan is not clearly traceable to particular funds in his possession. Although Aetna characterizes its claim as one for unjust enrichment, it actually seeks “legal relief-the imposition of personal liability .. for a contractual obligation to pay money.” 179 Fed Appx 304, 308-309, citing Knudson at 213. “As we held in Qualchoice, ‘a Plan fiduciary’s action to enforce a Plan-reimbursement provision is a legal action,’ which 29 U.S.C. 1132(a)(3) does not authorize. Qualchoice, 367 F.3d at 650.” Id. at 309. Clearly, payroll deductions for wages earned upon return to employment does not seek to recover particular overpayment funds in plaintiff possession.

Based on the foregoing, the district court agreed with the plaintiff that the “manner and method of t[the recoupment] transaction” and “the explanation for how and why this occurred” would be part of the administrative record, and therefore subject to discovery.

Note: The foregoing opinion was in the context of a discovery dispute in which the plaintiff sough information and administrative documents from the Plan relevant to the repayment of the alleged overpayments. The court granted the plaintiff’s motion and, as noted above, signaled doubts about the plan’s recoupment of funds. For a contrary view, see Seventh Circuit Approves “Contractually Based Recoupment” As Means Of Overpayment Recovery

Application of Sereboff? – The Sixth Circuit decision in Buchanan predated (by a little over a week) the Supreme Court’s decision in Sereboff v. Mid Atlantic Medical Services, Inc., 126 S.Ct. 1869 (2006). The district court did not discuss the impact of that decision on Sixth Circuit authority. Since Sereboff abrogated the Sixth Circuit’s opinion in Qualchoice, Inc. v. Rowland, 367 F.3d 638 (2004), the Buchanan holding is questionable to the extent it relied on Qualchoice as to the scope of ERISA Section 502(a)(3) remedies.

On the other hand, a recoupment of overpayment through deductions from wages may fail to constitute relief directed at “specifically identifiable” funds that are “within the possession and control” of the participant as required under Sereboff. Thus, to the extent Buchanan held that the overpaid funds were “not clearly traceable to particular funds in [the participant's] possession”, it may still be good law under Sereboff’s reasoning. Whether the funds offset in recoupment are benefits otherwise payable or wages, as in the Bell case, could make an important difference. The issue remains unsettled.

Third Party Reviewer -
The court also ruled that the practices and procedures of the plan’s third party reviewer must be disclosed in discovery, stating:

the contractual arrangements and the duties delegated to [Network Medical Review Company (NMR) and its affiliate Insurance Appeals, LTD (IA)] were . . . like the Plan itself, [a] part and parcel of the reasoning and evidence and form the procedures to be applied and considered in making the benefits determination. According to the website, NMR prides itself on contacting the treating physicians, explaining why such contact is important, and states: “Physician to physician contact has become the final step in providing closure to a file review.” Plaintiff alleges that no such procedures where followed here, her physician was never contacted, and instead her claim was denied because she failed to present “sufficient medical evidence.” . . . The Plan’s procedures would be part of the administrative record. The Plan cannot avoid its obligation to follow such procedures by contracting out to a third party its fiduciary obligations to evaluate plaintiff’s claims.