We recently observed that ERISA gives employers considerable leeway to design plan rules that fill in gaps in ERISA.  A recent Second Circuit case, Thurber v. Aetna Life Ins. Co., illustrates two important ways that plan drafting can meaningfully affect the outcome of litigation involving the plan:

  • First, a plan may specify the standard of review that a court must apply in a dispute.
  • Second, plan language can affect a plan’s ability to recover overpayments.

The case illustrates that good language that fills in gaps can save a lot of money.  In contrast, not filling in gaps — or having language that is not clear — can prove costly.

Facts.  Sharon Thurber received short-term disability benefits under a plan sponsored by her employer and insured by Aetna.  The plan said that Aetna may reduce benefits if the participant had “other income.”  Ms. Thurber had other income, but Aetna initially did not reduce her benefit payments.

After six months, Ms. Thurber’s short-term disability benefits expired and she applied for long-term disability benefits.  Aetna denied her claim and Ms. Thurber sued Aetna.  Aetna counter-sued, requesting that Ms. Thurber repay about $7,000 of other income that she had received while on short-term disability.

Plan’s Direction to Court.  In most ERISA cases, a key threshold issue is the standard the court should apply when reviewing a plan administrator’s benefit decision.  This case was no different.  Aetna said the court should defer to its decision to deny long-term disability benefits to Ms. Thurber.  This standard requires the court to affirm Aetna’s decision, even if the court disagrees with Aetna — unless the court finds that Aetna’s decision was arbitrary and capricious.  In support of its position, Aetna pointed to provisions in the plan document and summary plan description (“SPD”) that gave Aetna discretion to determine eligibility for benefits.  Under well-settled case law, if a plan reserves this discretion, the court generally must defer to the plan administrator’s decision.

Ms. Thurber said the court should review her claim de novo — that is, without taking Aetna’s decision into account.  Ms. Thurber acknowledged that the plan and SPD gave Aetna discretion to determine eligibility for benefits, but she said these discretion clauses should not be enforced against her because she had not received copies of either document.  Ms. Thurber said the only document that she received was a booklet that did not mention Aetna’s discretion.

The court sided with Aetna.  The court said that a provision affecting the court’s standard of review need not be included in the SPD, and can be enforced even if it were never disclosed to the participant.  The court recognized “strong arguments” that plan provisions must be disclosed to participants if they —

  • “affect the basic terms of the plan,” or
  • “affect what [a participant] must do to become eligible for benefits.”

But the court said those arguments do not apply for the standard of review provision, because that provision is a direction to the reviewing court that does not affect the participant’s right to benefits or responsibilities for claiming benefits under the plan.  The court concluded that such a provision did not have to be disclosed, and therefore applied the deferential standard of review.

As a result of this decision, the court deferred to Aetna’s decision that Ms. Thurber was not eligible for long-term disability benefits.  The plan language helped Aetna considerably.

Recovering Overpayments.  Aetna’s claim to recover overpayments was brought under an ERISA provision that allows a court to grant “appropriate equitable relief.”  For more than 30 years, courts have struggled with the question of whether, and under what circumstances, “appropriate equitable relief” may include a monetary payment.  Courts have applied several equitable principles that allow recovery of money, but the circuit courts are split over whether money may be recovered after it has been spent.

In this case, the Second Circuit sided with the courts that say a plan may recover money after it has been spent.  The court based its decision on the fact that the plan and SPD, and the booklet that Ms. Thurber admitted receiving, all authorized Aetna to reduce benefits by the amount of other income and to recover overpayments.  The court reasoned that the provisions describing Aetna’s rights put Ms. Thurber on notice that Aetna had a right to any other income payments — creating an “equitable lien by agreement.”  This equitable lien allowed Aetna to recover the other income, even though it was no longer in Ms. Thurber’s possession.

The court’s analysis distinguished between “equitable lien by agreement,” which allows recovery after the money has been spent, and “equitable lien sought as a matter of restitution,” which does not.  Again, plan language helped Aetna considerably: by addressing overpayments clearly, Aetna created an equitable lien by agreement and was able to recover money.