United States: [Podcast]: Fixing Retirement Plan Overpayments

In this episode of the Proskauer Benefits Brief, Paul Hamburger, co-chair of Proskauer's Employee Benefits & Executive Compensation Group, and associate Katrina McCann discuss how to fix retirement plan overpayments, based on (1) the type of plan (i.e., defined contribution or defined benefit plan), (2) whether the overpayment was with respect to a lump sum or ongoing payments, (3) the type of overpayment (whether it was to the wrong person or paid at the wrong time), and (4) who caused the overpayment. They discuss the requirements, the decisions involved, and certain ERISA and taxation issues that can arise when addressing these overpayments.

Listen to the podcast

Katrina McCann: Hello, welcome to the Proskauer Benefits Brief: Legal Insights on Employee Benefits and Executive Compensation. I'm Katrina McCann, I'm an associate in the New York office and on today's episode I am joined by Paul Hamburger a partner in our DC office and we're going to talk about how to fix retirement plan overpayments.

When we talk about retirement plan overpayments, we're specifically limiting this to retirement plans. Many of the principles we'll talk about today may apply to overpayments by other plans such as severance plans or health and welfare plans, but this discussion is specifically limited to retirement plan overpayments.

So, Paul what are the key factors to think about when we're evaluating how to handle an overpayment once you'd identified it?

Paul Hamburger: When we deal with overpayments from retirement plans, the first thing we want to look at is what type of plan are we talking about? Has somebody been overpaid from a defined benefit pension plan or have they been overpaid from a defined contribution retirement plan, like 401k plan for example? It is important to know because that's going to impact how we fix it and also it will help us identify the nature of the error.

The second factor we want to know is whether the overpayment was a single sum or lump sum overpayment amount or is it an overpaid annuity that might be paid over the course an employee or former employees' lifetime. So, are we dealing with an overpaid annuity or was it an overpaid lump sum?

The third factor to look at is the type of overpayment, so the questions that we ask here relate to following: Is this a type of money that was not even owed by the plan? In other words, did we pay too much money, but to the right person or did we pay any money but to the wrong person? The second type of overpayment is overpaying money that is part of what might be actually owed to somebody, so they haven't legitimately say in their account balance but I paid it at the wrong time. I paid it while they were still employed or I paid it at a time when they really weren't entitled to get that payment. So that is the factor that we want to look at is to the type or the nature of that overpayment.

The fourth factor is, who caused the problem? Did the participant mislead the plan in order to get the overpayment or did the plan administrator make a mistake and simply err in calculating the amount owed to the participant?

Katrina McCann: So, after understanding these four-key factors we move into the legal considerations. So, there are lot of unique issues that arise in these specific context, but let's talk about the general legal principles and considerations. We have to think about issues under ERISA and about tax qualification issues. Paul can you tell me a little bit more about the ERISA considerations involved with overpayments?

Paul Hamburger: Sure, when you have an overpayment from a retirement plan, either defined benefit pension or 401k type retirement plan, the error is going to have to be fixed by a plan fiduciary. Therefore, the way in which these errors are fixed has this fiduciary overlay to it. The fiduciary is to act in the best interest of the plan and its participants. So that means initially, how is the fiduciary going to get that overpaid money back into the trust?

There are three general ways that this happens. One is through a process called recoupment, where we recoup those monies from the person who received the overpayment perhaps. Method two is we offset, so for example, if we have an overpaid annuity we might offset future annuity payments or future amounts owed by the plan to compensate for the fact that earlier overpaid amounts were made. And the third decision the fiduciary might make is to just simply forget about it from the perspective of the participant.

Now if the fiduciary makes the decision to recoup, then the question is how much can be recouped from the person who received the overpayment, the participant, beneficiary or other individual? But at the end of the day, the employer is likely going to be a backstop to make the plan whole for that overpayment. It's possible that a record keeper that caused the overpayment may also make the plan whole, if they were actually the cause of it.

Often however, participants might not have the means to repay that overpayment, so it becomes tricky for the fiduciary to decide how far to go down the road of recouping from a participant as opposed to from an employer, who may make the plan whole more readily.

The third ERISA issue to consider is what does your plan say? Do you have plan terms or summary plan description terms that explain that if a participant is overpaid the plan reserves the right to recoup that overpayment or offset future amounts owed against the overpayment?

Katrina McCann: In addition to ERISA, we need to think about tax qualification issues. Paul, can you tell us a little more about these?

Paul Hamburger: Anytime a tax qualified retirement plan is involved in an overpayment situation, there is a qualification issue. The reason is that an overpayment means that the plan administrator has deviated from the terms of the plan and therefore we need to fix it. The recognized method of fixing overpayments through the IRS correction program, known as the employee plan's compliance resolution systems or EPCRS, has a number of steps that can be taken depending on what type of plan is involved, depending on whether it is a lump sum or an annuity and depending on the type of overpayment involved. A lot of this can be done through self-correction. Moreover there is an exception for de minimis amounts that are under $100. So, there is a great way to find a roadmap to curing overpayments by going through the rules in EPCRS.

Second if somebody did receive an overpayment it's possible that they rolled over that amount to an IRA or another qualified plan. Problem is, that that overpayment they were not entitled to can't in turn be rolled over. So therefore it has to pulled out of the IRA or other qualified plan. There are tax issues associated with over-contributions to IRAs that may come into play and then there are mitigating provisions to help ameliorate the impact of some of those excise taxes.

The third question that we deal with from a tax perceptive is: Are we fixing the error in the same year that the overpayment was made? Or, did the overpayment occur in one year and the fix isn't happening until a later tax year? That becomes very important because if it is going to be fixed in the same year before any amounts have been formally reported to the IRS, it is much easier to fix that type of a repayment issue than one where the money has already been reported as taxable on a form to the IRS. That becomes important because one of the recoupment methods that we talked about from an ERISA perspective which is also relevant from a tax perspective is having the person repay. If the person repays the overpayment, the problem may be if it crosses over tax years that they included the amount in income in an earlier year. Now they need to be compensated in the later year when they repay it. Historically there have been provisions that permit the deduction of that repayment in a later year. With the latest round of tax reform in place, it's not clear whether the same itemized deduction will be available for all those types of repayments. So that has to be looked at more closely.

And then the final thing from a tax perspective is we need to make sure we are appropriate; the plan is made whole for those overpayments. So, again even if we can't recoup from the participant we might be able to recoup from the employer or another service provider that caused the error in the first place.

Katrina McCann: Thank you for joining us today on the Proskauer Benefits Brief. Stay tuned for more legal insights on employee benefits and executive compensation and be sure to follow us on iTunes.

Listen to The Proskauer Benefits Brief

[Podcast]: Fixing Retirement Plan Overpayments

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions