Recovering Retirement Plan Overpayments: The Course of Is Key
A qualifying retirement plan that pays more distributions than a participant is entitled to is common. Common reasons for overpayments include a misjudgment of benefits due to a system failure, the fact that the plan sponsor has been unaware of the death of a participant for some time, or misapplication of a plan deployment (e.g. the definition of “Compensation”). While this is unfortunate for participants who have received an overpayment, a plan sponsor is required to reclaim overpayments on behalf of the retirement plan to protect the tax qualifying status of the plan and to comply with the sponsor’s fiduciary responsibilities under ERISA. Recent legal overpayment recovery lawsuit underscores the value of a sound administrative process in dealing with the inevitable overpayment problems that arise.
Legal problems with plan overpayments
Both the Internal Revenue Code and ERISA do not allow plan sponsors to assign or sell the benefits of a participant to third parties. ERISA has a fiduciary obligation to settle overpayments as any overpayment is a plan asset that is intended to benefit the entire plan. A trustee is therefore obliged, under the given circumstances, to attempt with care, skill, prudence and care to reclaim any overpayments made under a plan.
Overpay recovery options for defined benefit plans
Under the IRS Employee Plans Compliance Resolution System (“EPCRS”), there are four ways to correct an overpayment from a defined benefit plan:
- Repayment of the participant’s overpayment in a lump sum with a profit. This assumes that the plan sponsor returns the overpayment from the recipient to the plan in a lump sum with the profit calculated at the profit rate of the plan from the date of distribution until repayment of the overpayment.
- Overpayment contribution from the employer with income. The employer or another third party (e.g. the clerk if, for example, the overpayment is due to a mistake by the clerk) may contribute the amount of the overpayment plus income to the plan.
- Repayment of the overpayment by the participant by adjusting future payments. For benefits that are paid out in regular payments, overpayments can be corrected by adjusting future payments. Here, of course, there is a risk that the participant may die before the full repayment is made, which obliges the plan sponsor to repay the remaining amount to the plan.
- Retroactive change of plan. If the reason for the overpayment is a conflict between planned operation and documentation, a retrospective change in planned operation can be made under certain circumstances.
Overpay Recovery Options for Defined Contribution Plans
For a defined contribution plan, the rules are similar. The sponsor must take “reasonable steps” to repay the overpayment with revenue to the plan – whether from a participant, the plan sponsor, or another company. If the overpayment is solely due to the fact that no redistributable event occurred, no correction contribution is required and the subscriber’s account will be reduced by the overpayment amount.
The Zirbel case
The appellate court of the sixth instance recently ruled on a problem related to overpayments in Zirbel v. Ford Motor Co., 980 F.3d 520, 522 (6th Cir. 2020). In this case, the dispute revolved around an overpayment of nearly $ 250,000, which was an additional monthly payment of ten years. Ford, who was acting in his capacity as plan administrator, discovered the error four years after receipt of payment and applied for repayment, a right which was expressly provided for him in the planning document. Zirbel appealed to an administrative committee that rejected her appeal but offered her a hardship reduction that required full disclosure of her finances. Zirbel did not apply.
Zirbel sued Ford, demanding a statement that she was entitled to keep the money. Ford counterclaimed for a refund of the overpayment. The District Court gave Ford a summary judgment.
Zirbel appealed to the Sixth Circle, which confirmed the decision. The appeals court found that the scheme had a fiduciary duty to recover the amount and also noted that the decision to recover the amount was not “arbitrary and capricious.” In particular, the court pointed out that the plan offered several options to appeal the decision, as well as the option to request a hardness reduction, which Zirbel refused. Hence, nothing about the process has “sunk to the level of arbitrariness or…” […] Moodiness.”
Since overpayments are a common problem for plan sponsors, it is advisable for sponsors to prepare well in advance. Like Ford, plan sponsors should consider explicitly stating in the plan document that the plan administrator or other trustee has authority to collect overpayments. While this power has been implied by some courts, best practice is to be explicit. As with Ford, it is also advisable to establish a policy and process for verifying overpayments and allowing participants and beneficiaries to request some level of hardship relief if necessary.