In its recent decision in U.S. Airways v. McCutchen, all nine justices of the Supreme Court agreed that equitable principles do not override the clear terms of an ERISA plan.  Although a majority of the Court went on to find that the plan at issue was ambiguous, the decision makes clear that plan documents—when clear—may fill in gaps in areas that ERISA does not prescribe.  Employers may wish to address several of these areas in plan documents.  The McCutchen case shows that identifying these areas and drafting clear plan language can help achieve the plan sponsor’s objectives.

The Facts.  James McCutchen, a participant in a U.S. Airways health plan, was injured in an automobile accident.  The U.S. Airways plan paid $66,866 in medical benefits after McCutchen’s accident.  McCutchen later obtained from third parties a total settlement of $110,000, which, after paying attorneys’ fees, left him with a net recovery of $66,000.  The plan terms require a participant to reimburse the company for amounts paid for medical claims out of “any monies recovered from [a] third party.”

The plaintiff conceded that the plan terms would require him to pay the full $66,866 to the company.  However, he argued that the recovery under the plan terms should be limited by two equitable principles.  First, the plan’s recovery should be limited to the portion of his settlement attributable to medical expenses (and not pain and suffering or other losses) under the “double-recovery” rule.  Second, the plan’s claim should be reduced under the common fund doctrine to account for the attorneys’ fees paid to obtain his settlement. The question before the Court was whether equitable principles could rewrite the contractual language of the plan.

The Court’s Decision.  The Court unanimously agreed that equitable principles could not override the clear terms of a plan.  Writing for the Court, Justice Kagan noted, “if the agreement governs, the agreement governs.”  However, splitting 5-4, the Court held—despite the plan participant’s concession to the contrary—that the plan was ambiguous as to whether the reimbursement from the participant would be determined taking into account attorney’s fees.  Having identified a gap in the plan language, the Court then concluded that the common fund doctrine is the best indication of the parties’ intent.  Under the common fund doctrine, the claim for reimbursement under the plan would take into account the cost of obtaining the third-party recovery so that a participant would not be put in the position of paying more to the plan than the participant actually received.

Implications for Plan Sponsors.  The McCutchen decision affirms an important, but sometimes overlooked point:  Plan sponsors may draft their plans to provide enforceable contractual rules on matters where ERISA is silent or does not mandate a specific result.  The Court’s opinion states that these provisions must be enforced by courts, even if they provide for a result that a judge, plan participant, or beneficiary may view as inequitable.  In McCutchen, the contractual reimbursement provision was found to be silent with respect to the allocation of attorney’s fees incurred in connection with a recovery from a third party.  The court used equity to “fill in” the gap; however, if the language had been clear, the Court would have enforced the terms of the plan, without regard to equitable principles.

There are many areas about which ERISA is silent, and for which plan sponsors can provide meaningful contractual provisions.  A plan sponsor may wish to identify the areas ERISA leaves open, determine the sponsor’s intent, and then draft plan language setting forth its intent in clear language.

For example, in the case of the allocation of attorney’s fees that was the subject of the McCutchen decision, an employer that sponsors a self-insured health plan might consider setting forth in the plan document one of the following approaches:

• require reimbursement of medical costs from the entire amount the participant recovers from third parties, determined without regard to any fees or expenses incurred in obtaining the recovery (maximizing the reimbursement but potentially dissuading some participants from seeking recovery from third parties);
• require reimbursement of medical costs from the amount the participant recovers from third parties, determined after taking into account any fees or expenses incurred in obtaining recovery (potentially maximizing the incentive for participants to seek third party recoveries but reducing the maximum reimbursement); or
• require reimbursement of medical costs from the amount the participant recovers from third parties, determined after taking into account fees or expenses under a specified amount or percentage incurred in obtaining recovery (potentially creating an incentive for participants to seek third party recoveries subject to reasonable attorney’s fees).