Recovering Retirement Plan Overpayments: Process Is Key – Employment and HR


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Recovering Retirement Plan Overpayments: Process Is Key


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A qualified retirement plan paying more in distributions than a
participant is entitled to occurs frequently. Common reasons for
overpayments include miscalculation of benefits due to systemic
error, the plan sponsor being unaware of the death of a participant
for some time, or the incorrect application of the provision of a
plan (e.g., the definition of “compensation”). While
unfortunate for participants who received an overpayment, a plan
sponsor has an obligation to recover overpayments on behalf of the
retirement plan to protect the plan’s tax-qualified status and
comply with the sponsor’s fiduciary responsibilities under
ERISA. A recent court case involving the recovery of an overpayment
highlights the value of having a robust administrative process for
dealing with the inevitable overpayment issues that arise.

Legal Issues with Plan Overpayments

Under both the Internal Revenue Code and ERISA, plan sponsors
are not permitted to assign or alienate a participant’s
benefits to a third party. ERISA provides a fiduciary obligation to
recoup overpayments since any overpayment is a plan asset meant to
benefit the entire plan. Therefore, a fiduciary has an obligation
to attempt, with care, skill, prudence, and diligence under the
circumstances, to recover overpayments made from a plan.

Options for Recovering Overpayments for Defined Benefit
Plans

Under the IRS’ Employee Plans Compliance Resolution System
(“EPCRS”), there are four options for correcting an
overpayment from a defined benefit plan:

  1. Participant’s return of overpayment in a lump sum,
    with earnings
    . This requires the plan sponsor to have the
    overpayment returned by the recipient to the plan 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. Employer’s contribution of overpayment, with
    earnings.
    The employer or another third party (e.g., the
    recordkeeper if, for instance, the overpayment resulted from a
    recordkeeper error) may contribute the amount of the overpayment,
    plus earnings, to the plan.

  3. Participant’s return of overpayment by adjusting
    future payments
    . In the case of benefits distributed in
    periodic payments, overpayments may be corrected by adjusting
    future payments. Of course the risk here is that the participant
    could pass away prior to full recoupment, which obligates the plan
    sponsor to repay the remaining amount to the plan.

  4. Retroactive plan amendment. If the reason for
    the overpayment is a conflict between plan operation and
    documentation, a retroactive amendment to the plan’s operation
    may be made in some circumstances.

Options for Recovering Overpayments for Defined Contribution
Plans

For a defined contribution plan, the rules are similar. The
sponsor must take “reasonable steps” to have the
overpayment returned to the plan, with earnings-whether from a
participant, the plan sponsor, or another entity. If the
overpayment was solely due to no distributable event having
occurred, no corrective contribution is required and the
participant’s account is reduced by the overpayment amount.

The Zirbel Case

The Sixth Circuit Court of Appeals recently decided an issue
related to overpayments in Zirbel v. Ford Motor Co., 980 F.3d
520, 522 (6th Cir. 2020). In this case, the dispute centered on an
overpayment of nearly $250,000, which constituted an additional ten
years’ worth of monthly payments. Ford, acting in its capacity
as plan administrator, discovered the error four years after the
payments were made, and sought repayment, a right specifically
provided to it in the plan document. Zirbel appealed to an
administrative committee, which denied her appeal but offered her a
hardship reduction, which required full disclosure of her finances.
Zirbel did not apply.

Zirbel sued Ford, seeking a declaration that she was entitled to
keep the money. Ford counterclaimed, seeking restitution of the
overpayment. The district court granted summary judgment to
Ford.

Zirbel appealed to the Sixth Circuit, which affirmed the
decision. The Court of Appeals noted that the plan had a fiduciary
duty to recover the amount and also pointed out that the decision
to recover the amount was not “arbitrary and capricious.”
Specifically, the court pointed out that the plan provided several
opportunities to appeal the decision, as well as the opportunity to
apply for a hardship reduction, which Zirbel rejected. Therefore,
nothing about the process “sunk to the level of arbitrariness
or […] capriciousness.”

Conclusion

Because overpayments are a frequent problem for plan sponsors,
it is wise for sponsors to be prepared for them ahead of time. Like
Ford, plan sponsors should consider explicitly providing in the
plan document that the plan administrator or other fiduciary has
the power to collect overpayments. Although this power has been
implied by some courts, the best practice is to be explicit. It
also is wise, like Ford, to establish a policy and process for
reviewing overpayments and permitting participants and
beneficiaries to apply for some level of hardship relief, if
appropriate.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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