Guest Article

(From the October 21, 2002 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits. Hyperlinks within the article have been added by BenefitsLink.)

Plan's Case Against Participant's COBRA Fraud Not Preempted by ERISA

---

A plan participant who concealed his divorce to keep the former wife in his multiemployer health plan as an active participant, rather than pay COBRA premiums, can be sued for state common law fraud by the health plan according to the Seventh Circuit Court of Appeals. But plan fiduciaries have no equitable remedy against the participant under ERISA. AFTRA Health Fund v. Biondi, __ F. 3d __ (7th Cir., Sept. 6, 2002).

Although this decision generally is good news for ERISA plan sponsors, it does raise some interesting questions about the extent to which ERISA fiduciaries have a duty to identify fraud by participants.

Case Background

Under a 1992 divorce decree Biondi was required to pay the first 24 months of COBRA premiums for his wife Hazel, who was an active member of his multiemployer group health plan (the "AFTRA plan") at the time of their divorce. Under the terms of the AFTRA plan, Hazel was not eligible for coverage after the divorce. Additionally, the AFTRA plan SPD required participants to notify the plan administrator if the participant gained or lost a dependent eligible for coverage under the plan, stressing that such notice was especially important in cases of divorce or marriage. Biondi did not notify the plan and continued to cover Hazel as a dependent for 5 years, during which she incurred medical expenses of more than $100,000.

In 1997, Biondi's attorney sent a letter to the AFTRA plan in which Biondi offered to repay five years of COBRA premiums, with the explanation that Biondi thought keeping the former wife in plan was the appropriate way to fulfill the divorce decree. The AFTRA plan trustees did not accept the offer, and instead sued Biondi on two counts: (1) for relief under ERISA section 502(a)(3), which permits participants, beneficiaries and fiduciaries to redress violations of the plan or enforce the terms of the plan, and (2) for common law fraud. The trustees sought to recover from Biondi the more than $100,000 in claims paid for Hazel, attorneys' fees, costs, and $50,000 in punitive damages.

After a district court trial, the court ruled that ERISA section 502(a)(3) provided only equitable relief and such relief was not available in this case because Biondi did not directly receive any of the payments made on his ex-wife's behalf. However, the district court did permit recovery under common law fraud claims. Biondi appealed arguing that ERISA preempted common law fraud claims.

Court of Appeals Rejects ERISA Preemption Claim

The court of appeals disagreed with Biondi's ERISA preemption claim. The court's opinion began by noting that the Supreme Court's views on preemption's limits to state laws that "relate to any employee benefit plan" have been "at least mildly schizophrenic ..." in the words of another court of appeals. Essentially, the ruling court summarized the current ERISA preemption law as requiring the courts to use the objectives of ERISA as a guide to determining which state laws survive ERISA preemption and to look at the effect of those laws on ERISA plans.

The court referred to ERISA's statutory language outlining its objectives as:

protect . . . the interests of participants . . . and their beneficiaries, by requiring the disclosure and reporting . . . of financial and other information . . . by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans, and by providing for appropriate remedies, sanctions, and ready access to the Federal courts. . .

See ERISA section 2(b).

The court also noted the Supreme Court considers three situations in which a state law might "relate to" or have a "connection with" an employee benefit plan and as such would be preempted. These are state laws that (1) mandate a certain employee benefit structure or administration, (2) bind employers or plan administrators to particular choices or preclude uniform administration of plans, or (3) provide an alternative enforcement mechanism to ERISA.

Looking at these objectives, the court noted the plan fiduciaries in this case are seeking to recoup monies that the Fund improperly expended as a result of a plan participant's fraudulent conduct. Consequently, far from thwarting ERISA's stated statutory objectives, the trustees' common law fraud claim is an attempt to protect the financial integrity of the Fund, a goal that is certainly in the plan participants' and beneficiaries' best interests and consistent with the trustees' fiduciary obligations. The trustees' state-law fraud claim does not threaten in any way Congress's goal of national uniformity in the administration of ERISA plans. Finally, the trustees' claim does not mandate employee benefit structures or their administration, or bind plan administrators to particular choices or preclude uniform administrative practices.

The court also referenced a similar ruling in Geller v. County Line Auto Sales, Inc., 86 F.3d 18 (2d Cir. 1996).

Duty of Fiduciaries to Seek Out Fraud?

The Biondi case is obviously good news for plan administrators who learn of a fraud against the plan. But it also raises some interesting issues, not the least of which is, what is the duty of the plan administrator to guard against fraud. From the court's recital of the facts, it appears the trustees of the AFTRA plan would never have learned of Biondi's fraud, had Biondi himself not raised the issue. But plans rarely require confirmation of marriage and some plans still do not require the names and ages of children or birth certificates.

In such cases, plan fiduciaries have made the reasonable assumption most individuals are truthful and trustworthy. Nevertheless, with health care costs ever increasing, plan fiduciaries may want to examine their own procedures for confirming plan eligibility. This should start with a review of plan documents to clarify who in fact is eligible for coverage. The plan document should explicitly state who is and is not eligible and should note that the participant has a duty to notify the plan administrator when dependents are no longer eligible for coverage. (The AFTRA health plan SPD contained these provisions.) This notice also could include a warning that failure to notify the plan promptly of ineligible dependents may violate ERISA and tax laws and subject the participant to action under state fraud laws.

---

The information in this Washington Bulletin is general information only and not intended to provide advice or guidance for specific situations. Contact your Deloitte advisor for information regarding your specific circumstances. If you have questions or need additional information about this article and you do not have a Deloitte advisor, please contact Martha Priddy Patterson (202.879.5634) or Robert B. Davis (202.879.3094). Human Capital Advisory Services, Deloitte LLP, 555 12th Street NW, Suite 500, Washington, DC 20004-1207. Copyright 2002, Deloitte.

---

BenefitsLink is an independent national employee benefits information provider, not formally affiliated with the firms and companies who kindly provide much of the content and advertisements published on this Web site, including the article shown above.