The U.S. Supreme Court case Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan did not gain much attention before reaching the top federal court, but now that the case has been decided, ERISA attorneys are warning of significant potential impacts.

“The decision limits the ability of insurance plans to recover money from a beneficiary in a settlement,” explains Michael Graham, a partner with McDermott Will & Emery and co-chair of the firm’s ERISA Litigation Affinity Group. It may sound like an esoteric issue, but Graham and other experienced ERISA compliance professionals say the issue comes up quite a lot across a wide variety of employee benefit plans.

This particular case centers around one Mr. Montanile, who was involved in a car accident caused by a drunk driver, after which his Employee Retirement Income Security Act-covered (ERISA) health plan paid for his immediate treatments. As was the case here, very often there is a provision in such ERISA plans stipulating that if the plan pays in full and up front for emergency medical treatment, but then the participant ultimately recovers those costs in full in court—he or she must pay back the plan.

“This is pretty commonplace in employee benefit plans, especially health coverage,” says Nancy G. Ross, a partner in Mayer Brown’s Chicago office and member of the firm’s Litigation & Dispute Resolution practice.

Under plan terms, Montanile had a fairly clear obligation to reimburse the plan for his medical costs out of his recovery, according to Ross and Graham, but in this case, the plan did not immediately ask him to do so nor did he eventually do so. Of critical importance here, the plan waited “a pretty substantial period of time to formally pursue the money it was owed,” Ross observes, so by the time the plan tried to go after the recovery that Montanile had received, six months from the time the settlement money was paid to Montanile, he had spent the funds or had otherwise disseminated them.

So, the legal issue at hand became whether the plan’s efforts to recover what Montanile had recovered constituted an effort to obtain legal damages to be collected from unsegregated assets (which ERISA does not allow) or whether it could be characterized as some kind of equitable recovery of the plan’s rightful assets (which the terms of ERISA do allow).

NEXT: What SCOTUS said

According to SCOTUS, important to note is that the National Elevator board of trustees sued Montanile in federal district court under §502(a)(3) of ERISA, which authorizes plan fiduciaries to file suit “to obtain . . . appropriate equitable relief . . . to enforce . . . the terms of the plan, per 29 U. S. C. §1132(a)(3).”

As the Supreme Court decision explains, the board sought an equitable lien on any settlement funds or property in Montanile’s possession and an order enjoining Montanile from dissipating any such funds. Montanile argued that because he had already spent almost all of the settlement, no identifiable fund existed against which to enforce the lien. The district court rejected Montanile’s argument, and the 11th U.S. Circuit Court of Appeals affirmed, holding that “even if Montanile had completely dissipated the fund, the plan was entitled to re-imbursement from Montanile’s general assets.”

Both courts erred, according to SCOTUS: “When an ERISA plan participant wholly dissipates a third-party settlement on non-traceable items, the plan fiduciary may not bring suit under §502(a)(3) to attach the participant’s separate assets. Pp. 5–15. (a) Plan fiduciaries are limited by §502(a)(3) to filing suits ‘to obtain . . . equitable relief.’ Whether the relief requested ‘is legal or equitable depends on [1] the basis for [the plaintiff’s] claim and [2] the nature of the underlying remedies sought.’”

Complicating the matter, the Supreme Court points to an earlier case, Sereboff v. Mid Atlantic Medical Services, Inc., in which it actually established precedents that “the basis for the board’s claim—the enforcement of a lien created by an agreement to convey a particular fund to another party—is equitable.” Further, the Supreme Court’s precedents also establish that the nature of the National Elevator board’s underlying remedy—enforcement of a lien against specifically identifiable funds that were within Montanile’s possession and control—would also have been equitable, “had the board immediately sued to enforce the lien against the fund.”

“But those propositions do not resolve the question here,” SCOTUS concludes, “whether a plan is still seeking an equitable remedy when the defendant has dissipated all of a separate settlement fund, and the plan then seeks to recover out of the defendant’s general assets. This court holds today that a plan is not seeking equitable relief under those circumstances. In premerger equity courts, a plaintiff could ordinarily enforce an equitable lien, including, as here, an equitable lien by agreement, only against specifically identified funds that remained in the defendant’s possession or against traceable items that the defendant purchased with the funds … If a defendant dissipated the entire fund on non-traceable items, the lien was eliminated and the plaintiff could not attach the defendant’s general assets instead.”

NEXT: What it all means for ERISA plans 

It’s a particular feature of big-impact Supreme Court decisions that they can have such wide-ranging implications while actually settling very little for the parties involved. That seems to be the case here, as SCOTUS remanded the suit all the way back to the district court to determine, in the first instance, whether Montanile even kept his settlement fund separate from his general assets and whether he dissipated the entirety of the potentially collectable funds on non-traceable assets.

Reading into the SCOTUS decision, Graham says the court clearly held that a plan fiduciary “may seek equitable relief from a third-party recovery only when it can identify a traceable fund into which the third party settlement or judgment was deposited.” Perhaps less important for retirement plans, but of critical importance to plan sponsors and financial officers, the Supreme Court justices also firmly held that a plan fiduciary “cannot seek equitable relief for medical benefits previously paid from a participant’s or beneficiary’s general assets when the third party settlement has been dissipated.”

Noting one silver lining for employers, Graham feels the court has also ruled that, from an ERISA §502(a)(3) perspective, equitable relief may still be asserted against a plan participant or beneficiary that co-mingles a third-party settlement or judgment with other assets in a combined account, or when the funds from a third-party settlement or judgment are used to pay for traceable assets (i.e., a house or a car).

Ross warns that the details of this case happened to be related to a health plan, “but retirement plans find themselves in fairly similar situations all the time.”

“Overpayments by benefit plans are a huge issue,” she concludes. “It’s somewhat commonplace, in fact, just given the complexity of calculations and the fact that mistakes happen. There has, frankly, been an increase in these kinds of cases all up and down the court system and they’re going through similar arguments.”

The full text of the decision is here.