Plan Sponsor's Ability to Waive / Negotiate Subrogation Rights

[401 Chaos]

Employer has self-insured health plan administered by large national insurer providing administrative services only. Plan document contains very broad, expansive "latest and greatest" subrogation provisions provided by ASO provider.  Employee / participant was injured in auto accident more than a year ago.  About a year ago, participant's lawyer wrote employer inquiring about plan sponsor / employer's willingness to waive subrogation rights under the plan or possibly agree to reduced subrogation amounts.  Lawyer also requested usual host of plan documents per ERISA.  Employer / Plan Sponsor did not respond or provide any plan documents.  Participant's lawyer has surfaced again noting they have negotiated settlement and are ready to disburse proceeds.  Lawyer reminded employer of its failure to provide documents per ERISA and the potential penalties that have now accrued.  Lawyer is pushing for immediate answer from employer on follow-up request to waive all subrogation rights (or settling for about 1/15th of value) in exchange for agreeing not to report plan's failures to provide plan documents.  The overall subrogation amounts at issue here are not that great. 

Employer freely admits it ignored all requests to provide documents.  Can the employer (as plan sponsor and ultimate ERISA plan administrator) agree to simply waive pursuing subrogation here without giving rise to a possible fiduciary breach or other potential exposure?  Any suggestions on how to negotiate and limit possible exposure to employer?

[Peter Gulia]

Without reading the health plan (including its provisions for the plan’s or the employer’s equitable liens and other recovery rights), the employer/administrator’s contract with its third-party administrator, and the stop-loss insurance contract (if any), it’s hard to know what set of compromises, satisfactions, and releases might make sense.

If anyone would release or compromise a claim that belongs to the plan:

Consider whether the analysis and decision-making must or should be done by a fiduciary who is independent of those who breached a duty to furnish documents and those who might have breached a duty to oversee or monitor other fiduciaries.

Consider whether advice must or should be from a lawyer who advises only the plan and is sufficiently independent of the possibly breaching fiduciaries.

Consider whether a settlement needs prohibited-transaction relief, whether under PTE 2003-39 or in some other way.

If the plan might have claims against the possibly breaching fiduciaries, the employer with its counsel might evaluate whether the conduct was within or beyond the standard (usually, in or not opposed to the employer’s interests) for the employer’s indemnification provided to its executive and employees asked to serve as the plan’s fiduciaries. Yet, consider too whether the employer’s obligation to fund the self-funded health plan washes the plan’s loss that otherwise might be a subject of the plan’s claim against a breaching fiduciary.

These points might seem odd if the employer provides most of the plan’s funding. But it’s useful to analyze all the roles and relations, including recognizing the health plan as a distinct person, even if that results in finding that the employer exclusively or primarily is dealing with the employer’s money.

It’s much better to have a written analysis showing the plan suffers no loss or harm because the employer is obligated (and has financial capacity) to meet everything that could have been recovered from the participant.

This is not advice to anyone.

Class Exemption to release claims 2010-14381.pdf

[401 Chaos]

Thanks, Peter.  This is very helpful.  I'm particularly drawn to your comments at the end:

Yet, consider too whether the employer’s obligation to fund the self-funded health plan washes the plan’s loss that otherwise might be a subject of the plan’s claim against a breaching fiduciary. . . . It’s much better to have a written analysis showing the plan suffers no loss or harm because the employer is obligated (and has financial capacity) to meet everything that could have been recovered from the participant.

The particular rub here is that the total amount at stake is relatively low.  So low in fact the subrogation amount is far less than the potential penalties for failing to produce the plan documents at this point.  Add to that the fact that just trying to think through the hiring of outside counsel to advise the plan or consider prohibited transactions and/or to "establish" some independent fiduciary would, I'm afraid, be beyond the financial appetite (not to mention the attention spans) of the primary players even though I agree those are all very wise and appropriate suggestions.

In this situation, the employer is very large and financially strong and stable.  While significant amounts go into the plan from employee contributions, the vast majority of the funds are employer funds and I cannot imagine the company ever having any issue or concern making the plan whole for the amount at issue.  I know that's the practical end result but not sure how to easily get to an appropriate written analysis showing the plan suffers no harm and making clear the employer's obligation to make the plan whole.

[Brian Gilmore]

Subrogation/reimbursement situations are commonly negotiated by the employer plan sponsor and plaintiff counsel.  This is an unusual one because the counsel is using the document production failures as leverage on the reimbursement amount, but that does not change the general positioning here.

5 hours ago, Peter Gulia said:

These points might seem odd if the employer provides most of the plan’s funding. But it’s useful to analyze all the roles and relations, including recognizing the health plan as a distinct person, even if that results in finding that the employer exclusively or primarily is dealing with the employer’s money.

I think this is a key point from Peter above.  If this is a plan where benefits are paid from the employer's general assets, I don't consider there to be a significant fiduciary issue with respect to potential reimbursement amount.  

2 hours ago, 401 Chaos said:

While significant amounts go into the plan from employee contributions, the vast majority of the funds are employer funds and I cannot imagine the company ever having any issue or concern making the plan whole for the amount at issue.

Yes, and the employee funds are not held in trust, so they are just comingled with the employer's general assets.  Where the plan is not funded by a trust, there is effectively no connection between the reimbursement amount and the plan.  It effectively just means the employer has paid more for plan benefits than it otherwise might have.  So I view this more as an employer budgetary/business decision than a fiduciary one since there is no pool of plan assets (i.e., trust) to make whole here.

Here's some commentary on a similar issue re the recent J&J litigation:

• https://www.newfront.com/blog/j-and-j-case-practical-considerations-the-erisa-trust-rules-for-health-plans-part-1
• https://www.newfront.com/blog/j-and-j-case-practical-considerations-the-erisa-trust-rules-for-health-plans-part-2

[Peter Gulia]

If it is obvious that all steps are about the employer dealing with the employer’s money with no risk of loss or harm to the employee-benefit plan, someone acting for a self-funded (that is, unfunded) health plan’s administrator might approve the settlements without independence from the plan’s other fiduciaries who might have breached.

Perhaps the plan’s release of its rights to reimbursement from the participant might not meaningfully release much of anything if the employer has paid in and satisfied the amount the plan would have obtained from the participant. The employer might pay the amount into the plan’s bank account before the plan or its fiduciary signs the agreement that releases the plan’s right to reimbursement.

Likewise, there might be less need for a lawyer advising the plan to be independent of the fiduciaries and the employer if the plan’s legal and equitable rights and remedies have been satisfied.

(A lawyer might consider whether each of the plan and the employer waives a professional-conduct conflict of the lawyer advising, and maybe acting for, both the employer and the plan. But again, there might be no real economic consequence the plan bears.)

There would still be a need for some lawyering because the employer that indemnifies the plan’s administrator and other fiduciaries wants good releases of the participant’s claims, including a claim grounded on the administrator’s failure to furnish documents.

And while a lawyer (who might be inside counsel) is on task, she might write the memo to explain that the plan’s release of reimbursement from the participant was not a giveaway because the employer satisfied the participant’s obligation.

This is not advice to anyone.

[Peter Gulia]

For some courts’ decisions about whether a health plan’s participant lacks Article III constitutional standing to pursue a claim on a fiduciary’s breach of its responsibility to the plan, see, for example:

Cox v. Blue Cross Blue Shield of Mich., 216 F. Supp. 3d 820, 62 Empl. Benefits Cas. (BL) 2465, 2016 BL 360306 at *4-5 (E.D. Mich. Oct. 28, 2016) (“Here, the fourth amended complaint does not clearly allege facts that Plaintiffs suffered any particularized and concrete injuries as a result of BCBSM’s alleged charging of hidden fees, such that they were affected ‘in a personal and individual way.’ For instance, there are no allegations that the amount of Plaintiffs’ contributions to their plans were affected in any way by the hidden fees, that Plaintiffs themselves paid the fees to BCBSM, that Plaintiffs were denied or received fewer benefits because of the fees, or that the plans passed on to Plaintiffs any increase in the fees.  . . . . At most, it is Plaintiffs’ healthcare plans that suffered concrete and particularized injuries when they paid BCBSM the hidden fees. This is not concrete or particularized harm to Plaintiffs. And even if returning funds to the plans might, in some unspecified way, benefit Plaintiffs, that would not establish that Plaintiffs had been harmed by BCBSM—any more than a windfall establishes a preceding injury, even though the windfall would surely benefit the recipient.”).

Kauffman v. General Elec. Co., No. 14-CV-1358, 2017 BL 204157 (E.D. Wis. June 15, 2017) (finding that plaintiffs had not enough alleged enough facts to show how a fiduciary’s supposedly inaccurate or misleading communications—about an intent to continue a health benefit—harmed the plaintiffs for “concrete injury” Article III standing) (“[P]laintiffs argue that GE deprived them of wages or other compensation that they may have sought or received if they’d understood that the benefits they expected to receive under the plans were not as secure as GE said they were, but plaintiffs have not submitted adequate evidence of any such injury to themselves or anyone else.”).

Scott v. UnitedHealth Group, Inc., No. 20‐CV‐1570 (PJS/BRT) (D. Minn. May 20, 2021) (applying Thole, and finding no Article III standing; the plaintiffs had alleged injury to the plan, not to themselves).

Winsor v. Sequoia Benefits & Ins. Servs., LLC, 62 F.4th 517, 524, 528 (9th Cir. Mar 8, 2023) (“Plaintiffs have not alleged that RingCentral has changed or would change employee contribution rates based on Sequoia’s alleged breaches of fiduciary duty, or that employee contribution rates are tied to overall premiums.”) (“Here, plaintiffs have not established that they have some equitable interest in plan funds {the self-insured health plan is unfunded} that the Thole plaintiffs lacked, or that the comparison to trust law can have purchase here when it did not in Thole.”).

Knudsen v. MetLife Group, Inc., No. 2:23-cv-00426 (WJM), 2023 U.S. Dist. LEXIS 123293, 2023 WL 4580406 (D.N.J. July 18, 2023) (complaint dismissed because the plaintiffs lack Article III constitutional standing) (“Plaintiffs do not contend that they did not receive their promised benefits, Instead, Plaintiffs allege that they paid excessive out-of-pocket costs, which in the context of this kind of defined[-]benefit-type {health and welfare benefits} Plan, is not an individual injury.”), affirmed, No. 23-2420, --- F.4th --- (3d Cir. Sept. 25, 2024) (“Given the standing theory that Plaintiffs advance, their Complaint must include nonspeculative allegations, that if proven, would establish that they have or will pay more in premiums, or other out-of-pocket costs, as a result of MetLife not applying the $65 million in rebates to the Plan.  . . . . To do so, Plaintiffs’ ‘pleadings must be something more than an ingenious academic exercise in the conceivable.’”).

In my view, some of these cases likely were wrongly decided. But judges and lawyers might read them as consistent with a Supreme Court opinion:

Thole v. U.S. Bank N.A., 590 U.S. 538 (June 1, 2020) (A defined-benefit pension plan’s retiree who does not show a palpable risk that the plan will become unable to pay her promised benefit lacks constitutional standing to sue in courts of the United States.).

[401 Chaos]

Thanks very much for these additional responses.  There is no trust here.  Also, for what it's worth, the accident occurred in 2023 with all expenses incurred and paid in 2023 so the benefits promised for the 2023 Plan Year were all provided and covered.  The participants (including the injured participant) paid in the insurance contribution amounts requested for 2023 and the employer ensured the plan covered all covered expenses.  Also, no stop loss coverage was triggered for the injured participant at issue here. 

Apart from reimbursing the employer for expenses the employer would not have incurred had the accident not occurred, collecting on the subrogation amount (or not) would not appear to have any economic impact on the plan or benefits provided under the plan so agree with Bryan that this all seems like an employer business / budgetary decision at this stage.  Even if the plan document issue was not in the mix the plan administrator might still be free to decide not to pursue subrogation here.  That may arguably result in a bit of a "windfall" for the participant but it does not seem that causes any harm to the plan or other participants.  The fact that waiving subrogation here may have the result of saving the plan administrator and ultimately the employer from additional expenses doesn't really trouble me under these circumstances.  (Obviously, the plan needs to do a better job responding to document requests and the plaintiff's lawyer is being fairly zealous in his representation here but I'm not sure that changes the result.)

Given the facts here, it also does not seem to me that the employer / plan sponsor needs "permission" from the third party administrator or the subrogation recovery group pursuing the subrogation claims.  Obviously, they need to reach out to the TPA and the subrogation recovery group to let them know of the decision (and may share why since the TPA apparently told them not to respond in any way to the initial lawyer correspondence requesting copies of the plan documents as well as a request to waive subrogation) but I don't see them needing the TPA or subrogation recovery group's permission.  Does that make sense? 

I also think in-house counsel should let the attorney know they will not pursue subrogation of the currently identified amounts provided the injured employee agrees not to disclose the failure to provide the plan documents and signs a short general release around that.  And suggest that they also go ahead and provide the requested documents.  Thoughts?  

[Peter Gulia]

Think carefully about how to write the releases.