The Gremlin of ERISA Liens

ERISA liens are a big part of the reason why many settlements end up disappointing so many.

Once upon a time, if a lawyer emerged victorious in a settlement, a client could be told exactly what the victory would net him/her after fees, costs, and liens. A clear distinction existed between those liens that had to be paid back and those that didn’t. Some government liens were statutorily required to be paid back, while all other private liens were prohibited. Enter ERISA.

If ERISA were human, she’d be an ex-girlfriend of death. In fact, the Employee Retirement Income Security Act and the cases interpreting it introduce a dust storm of arcane legal doctrine and ambiguity to the question of what liens must be paid back. Legal questions dot the fur like fleas on your pet. Which health plans and disability plans are promulgated pursuant to ERISA? Which of those ERISA plans are self-funded and thus entitled to federal preemption of state anti-subrogation statutes? Does the request for reimbursement meet the requirements of equitable restitution or is it merely a claim for money damages? What is the lawyer’s obligation under rules of ethics?

Franklin D. Roosevelt once said, “You have nothing to fear but fear itself.” In fact, ERISA collection agents utilize fear to claim an entitlement to a client’s settlement money.

The reality is quite different. The universe of liens that preempt state anti-subrogation statutes is tiny. The plan must be promulgated under ERISA, and must fully self-fund all medical expenses incurred by its plan participants. If the plan is operated by a commercial insurer some portions of state law are still applicable – thus anti-subrogation statutes can apply even if self-funded.

Only the expenses actually paid by the plan compel preemption of anti-subrogation law in many states. Lawyers should ask questions when ERISA comes calling. Is the plan really ERISA? Is it self-funded? How much is it self-funded? Is the government paying? What do the agreement and the contracts say about third-party recoveries?

Lawyers can do better for their settlement clients. In most cases, a time of celebration shouldn’t have to culminate as the Grim Reaper’s Ball.

Alexandra Reed writes for Connecticut personal injury law firm, Stratton Faxon.

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