New Rules on Retirement Plan Duty to Recover Benefit Overpayments
The Secure Act 2.0 deals with many benefit-related matters including changes to the prior law which generally required retirement plan fiduciaries to take reasonable action to recover any overpayment of plan benefits – even if the overpayment resulted from mistakes made by administrators of the plan. Such action would require efforts to recover benefit overpayments from participants and their surviving beneficiaries by cash payments to the plan or recoupment from future benefit payments in the case of befits paid in the form of a monthly pension. The prior law is summarized in court opinions such as Bacckes v. Kaiser Foundation Health Plan et al., a 2014 decision of the District Court for the Northern District of New York (see HERE for details).
The relief offered by Secure 2.0 applies both to affected participants and their beneficiaries as well as the fiduciaries responsible for plan operations, including the employer which sponsors the plan. While there’s something in the new rules to benefit all of these stakeholders, this is not blanket relief. The devil, as they say, is in the details.
The Secure 2.0 relief applies only to an “inadvertent benefit overpayment” which excludes any overpayment that results from misrepresentation by a plan participant or an overpayment that the participant knows was significantly more that the correct benefit amount. Only “innocent” participants are afforded protection under the new rules. An “overpayment” for this purpose also includes payment that is not provided by the plan or permitted by law. So, for example, payment of a survivor benefit to the children of a participant by a prior marriage instead of the current spouse because the participant concealed his current marital status in completing a beneficiary designation would not be covered by the new rules. In those circumstances, plan fiduciaries would generally be required to consider taking action to recover the payment of the survivor benefit plus interest from the participant's children.
Here are the highlights of the Secure 2.0 relief provisions:
- Plans are now prohibited from seeking recovery of participant overpayments from the participant's surviving spouse, former spouse or any other death beneficiary. So the death of the participant terminates any overpayment recovery claim.
- No recovery action can be taken against an “innocent” participant if the overpayment (or the first of a series of overpayments) was made more than three years before the participant is given notice of the overpayment by plan administrators.
- Participants are permitted to treat inadvertent benefit overpayments as “eligible rollover distributions” if the plan does not seek recovery of the overpayment. This means that such overpayments are entitled to tax deferred treatment in rollover transfers to an IRA or successor retirement plan even if the overpayment amount is not consistent with the retirement plan benefit provisions or the prior definition of eligible rollover distributions.
- Only the amount of the benefit overpayment, and not interest or collection costs, can be recovered from “innocent” participants under the new rules.
- Plan fiduciaries are relieved of general duty to seek recovery of benefit overpayments. Secure 2.0 allows those fiduciaries to exercise their discretion as to whether or not to take action permitted under the new rules to recover from a participant, beneficiary or plan sponsor any inadvertent overpayment. This relief does not apply to an employer if the overpayment resulted from the employer’s breach of fiduciary duty.
- A retirement plan sponsor is not required to make a “corrective contribution” to reimburse its retirement plan for any benefit overpayment that is not recovered by the plan from a participant or beneficiary. However, this relief does not apply if (a) the retirement plan is a defined benefit plan and the employer's reimbursement would be necessary for the plan to be reasonably able to make benefit payments; (b) the overpayment results from a breach of fiduciary duty by the employer or another plan fiduciary; or (c) if the benefit overpayment is made by mistake from another participant's account in a 401(k) or other defined contribution plan.
There is some relief for both innocent participants and innocent employers in the new rules. But employers and other plan fiduciaries will need to carefully consider (and document) any decision not to seek recovery of a benefit overpayment when they have the discretion to do so (see item 5 above).
Bear in mind that fiduciary duties are owed to all plan participants and beneficiaries, not just the recipient of a benefit overpayment. So plan fiduciaries exercising discretion not to seek recovery of a benefit overpayment should have a good reason not to do so. It follows that a plan fiduciary should not decide to forego collection of a benefit overpayment solely to relieve the employer from an obligation to make a corrective contribution to the plan – especially if the decision maker is the employer!
Plan fiduciaries may need to discuss such decision-making and whether or not any overpayment resulted from a breach of fiduciary duty with professional advisors or legal counsel. But remember that communications with the employer’s corporate or benefits lawyer may not be subject to the attorney-client privilege. Consider seeking independent legal counsel to assure the confidentiality of any communications relating to such fiduciary matters.