Working Indiana - Working for Democracy and Justice

 Here is a problem that sometimes arises in smaller enterprises: the boss arranges for a package of fringe benefits, perhaps a 401(k), some form of profit sharing and, most important, group health coverage.  An employee falls ill and seeks reimbursement under the terms of the group health Plan.  Unfortunately, treatment is protracted and expensive and the employer finds that he cannot afford to provide group health coverage in the subsequent plan year.  Or, even without a catastrophic claim, cash strapped management diverts employee health premium contributions to other purposes.  Sometimes when this latter situation arises management may continue withholding for benefits even though coverage is no longer provided and the company may be reluctant to inform its workers of its “decision.”  Now, under ERISA, the sponsor may terminate health coverage altogether if it wishes.  A sponsor may not allow participants to incur “covered” medical expense without telling them the Plan has been ended, however.  If a Sponsor does not inform workers that he has let coverage lapse participants will continue to seek and receive treatment, incurring ongoing expenses in the (erroneous) belief that the expenses will be covered.

It would seem when this occurs that workers have a claim against their employer, as “sponsor” (one of ERISA’s named fiduciary categories) for breach of fiduciary duty.  They may still have claims against the Plan and the Plan may have a claim against the Sponsor for failure to fund but what happens in the more complicated (and commonplace) circumstance where the Plan is finally officially terminated by the employer/sponsor but not until workers have run up covered health care claims?

Under ERISA, remedying this simple injustice is miraculously transformed into an exercise in sophisticated, frustrating, and potentially lethal logic.

The difficulties begin with ERISA’s remedial measures.  Unhappy employees would first turn to ERISA 502(a)(1)(B) which permits participants to bring a civl action to recover benefits due.  But the appropriate defendant in a 502(a)(1)(B) claim is the Plan and here the Plan no longer exists.  They would then turn to ERISA’s “catch all” provision, 502(a)(3).  502(a)(3) permits a participant to bring a civil action under 502(a)(3)(B) to obtain “other appropriate equitable relief.”  Participants can sue a Plan Sponsor under 502(a)(3)(B) but case law limits the relief they might obtain to relief “typically” available in equity in 18th century England.  Participants would need to convince a Court under this section that paying their doctor bills could be seen as a form of “equitable restitution.”  Many courts, however, have been reluctant to take this step.

That would leave participants with ERISA 502(A)(2), permitting them  to sue for “appropriate relief” under section 409.  Since 409 treats of liability for Breach of Fiduciary Duty and since the duty to fund a live plan is a fiduciary duty it would seem that there was, indeed, a means available for satisfying the participants unpaid medical creditors.

Not so fast.

Section 409 imposes personal liability upon fiduciaries “to make good to (a) plan any losses to the plan...”  The participants’ unpaid medical bills are not losses to the plan, they are individual participant claims.  

Over next door in the 6th Circuit, Kathleen Pfahler and some co-workers brought claims against National Latex, GE Capital and named fiduciaries for misusing employee contributions and misrepresenting to them that their health claims would be paid.  By the time suit was filed, the National Latex Plan was defunct.  The employees, however, argued that their claims were brought derivatively, or on behalf of the defunct Plan.  Noting that case law developed in the train of 502(a)(2) clearly limited actions to those in which beneficiaries sought relief “on behalf of” a Plan, the Court refused to be persuaded by the one District court case employees relied upon.  That case, Jackson v Truck Drivers’ Union Local 42 Health & Welfare Fund, 933 F. Supp. 1124 (D. Mass. 1996) concerned a claim advanced by a single participant in a defunct plan.  There, the Court allowed the participant to obtain damages from the fiduciaries under 502(a)(2) on the defunct plan’s behalf and approved a “constructive trust” for receipt of those funds, finding, in conclusion, that the plaintiff might then obtain equitable restitution including an order that the trustees should pay the benefits due.

The Pfahler Court noted strong precedent in the 6th Circuit emphasizing that plaintiffs under 502(a)(2) simply could not seek recovery of personal claims.  The Pfahler Court disapproved of the Massachusetts Court’s failure to honor this distinction and further noted that “if plaintiffs could re-characterize individualized claims for money damages (e.g. unpaid benefits) as claims asserted on behalf of the...Plan, the careful distinction between section 502(a)(2) and Section 502(a)(3) breach of fiduciary duty claims, drawn by Congress and the United States Supreme Court, would be stripped of meaning.”

The Court next examined the viability of a claim for recovery couched in terms of ERISA 502(a)(3), the section permitting disgruntled participants recovery for “other appropriate equitable relief.”  Noting that Courts had interpreted this section as permitting claims for relief for breach of fiduciary duty, the Pfahler Court nonetheless reminded the participants that, under ERISA case law, “almost invariably...suits seeking (whether by judgment, injunction, or declaration) to compel the defendant to pay a sum of money to the plaintiff are suits for money damages...and money damages are, of course, the classic form of legal relief.”  The judge in Pfahler, discounted the importance of earlier precedent from a sister tribunal (McFadden v R & R Engine & Machine co., 102 F. Supp. 2d 458 (N.D. Ohio 2000)) that had found an award of unpaid benefits constituted equitable restitution because intervening Supreme Court precedent clarified the meaning of “restitution” under ERISA.  Unfortunately for these participants,  the Supreme Court had pronounced that restitution was an equitable remedy to the extent an action sought to “restore” “money or property identified as belonging in good conscience to the plaintiff that could clearly be traced to particular funds or property in the defendant’s possession.”

Pfahler v National Latex 405 F. Supp.2d 839 (N.D. Ohio 2005) was decided three years before the United States Supreme Court revisited the scope of relief available under ERISA 502(a)(2).  Last year, in LaRue v Wolff, Boberg & Associates 128 S. Ct 1020 (2008) the Supreme Court permitted a participant to sue for individual relief under ERISA 502(a)(2) for losses experienced after a plan fiduciary failed to carry out his investment instructions.  However, this departure from prior law appears to have been narrowly tailored and the LaRue Court expresses its conclusion thus: “we...hold that although §502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries, that provision does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant’s individual account.”

The Pfahler plaintiffs and future generations of workers who find that they were uninsured without knowing it are still likely to be without a remedy.  § 502(a)(3) remains limited to a narrow band of equitable remedies and § 502(a)2 would only prove satisfactory if future Courts could view unreimbursed medical bills as “plan assets” whose “value” has been “impaired”--an improbable eventuality.