Be Prepared to Recover Retirement Plan Overpayments

Sometimes too much of a good thing is…too much. And that’s the case when a participant is overpaid. A recent blog entry discusses the importance of having a process for recovering those overpayments.  

In “Recovering Retirement Plan Overpayments: Process Is Key,” Eric Gregory, an Employee Benefits and Executive Compensation Attorney at Dickinson Wright PLLC, suggests that overpayments of retirement plan distributions are not uncommon. But their being an almost routine part of benefits administration does not translate to unimportance. In fact, he writes, plan sponsors are obliged to recover them. Gregory outlines the issues involved and stresses the need to be ready to handle overpayments. 

Why?

So why do overpayments occur? Gregory says that among the reasons are: 

• not knowing that a participant died;  
• erroneously calculating benefits; and 
• erroneous application of plan provisions. 

And why does it matter? Gregory warns that failure to recover overpayments can threaten a plan’s status as a qualified plan. Not only that, it’s a fiduciary duty. He notes that under ERISA, overpayments must be recovered because they are plan assets. “Therefore, a fiduciary has an obligation to attempt, with care, skill, prudence, and diligence under the circumstances, to recover overpayments made from a plan,” Gregory writes. And he adds that not only under ERISA, but also according to the Internal Revenue Code, a participant’s benefits may not be assigned or alienated to a third party. 

What to Do? 

Gregory points out that there are four things that can done under the IRS’ Employee Plans Compliance Resolution System (EPCRS) when a defined benefit plan makes an overpayment:

1. Have the recipient of the overpayment return it in a lump sum with earnings, calculated at the plan’s earnings rate from the date of the distribution until the overpayment is repaid.
2. The employer—or recordkeeper, it the overpayment is their doing—can contribute the amount of the overpayment, as well as the earnings, to the plan. 
3. Benefits distributed periodically may be corrected through adjustments to future payments.
4. A retroactive amendment can be made to the plan’s operation under some circumstances if a conflict between the plan’s terms and its operation caused the overpayment. 

If a defined contribution plan makes an overpayment, Gregory says, a plan sponsor is required to take “reasonable steps” to recover the overpayment, as well as earnings. However, he adds, if the overpayment was not due to a distributable event, no corrective contribution is required and the participant’s account is to be reduced by the amount of the overpayment.

The Bottom Line 

Be prepared for overpayments ahead of time, Gregory argues. One way to accomplish this, he suggests, is to explicitly state in the plan document that the plan administrator or other fiduciary can collect overpayments. Establishing a policy and process for reviewing overpayments is another way to head off such problems, Gregory says.