Secure 2.0 significantly changed the rules for correction of overpayments from a retirement plan. Recoupment of inadvertent overpayments to participants and beneficiaries is generally no longer required and if plan fiduciaries exercise discretion to forego recoupment, they generally will be protected from fiduciary liability for that decision and the plan’s qualification will not be impacted. If, on the other hand, plan fiduciaries do decide to recoup, they must heed new limitations designed to protect participants/ beneficiaries. These new rules became effective immediately upon Secure 2.0’s enactment in December 2022 so this new law is in effect now.
What should plan fiduciaries know?
Plan fiduciaries are no longer required to recoup an overpayment so long as:
1. The overpayment was inadvertent; and
2. Foregoing recoupment will not cause an impermissible forfeiture to fail to be restored or violate minimum funding rules and other Code requirements such as Code Section 401(a)(17) (relating to the annual compensation limit) and Code Section 415 (relating annual additions limits.)
But If plan fiduciaries do decide to recoup an overpayment:
1. No interest or other collection amounts may be charged.
2. No recoupment is available from beneficiary (including spouse) for overpayments made to participant.
3. No recoupment is available if the first overpayment occurred more than three years before notice of the overpayment is given to the participant or beneficiary (except in the case of fraud or misrepresentation).
4. Recoupment efforts cannot threaten litigation or use collection agencies except in limited circumstances.
5. The recipient of the overpayment must have the right to contest recoupment through ERISA compliant claims procedures.
6. Plan fiduciaries may take into account the hardship that recoupment might cause to the overpayment recipient.
7. There are additional rules that govern recoupment of overpayment of an annuity via future benefit payments reductions/installment payments.
8. Recoupment (other than in connection with an annuity) must comply with DOL rules to be issued in the future.
What should participants/beneficiaries know?
Participants and beneficiaries should know that the limitations outlined above generally do not apply (except for the right to use the claims procedures and the plan fiduciaries may still consider hardship) if they were “culpable,” in causing the overpayment. Specifically, a participant is defined as culpable under Secure 2.0 if they bear responsibility for the overpayments “such as through misrepresentation or omissions that led to the overpayment” or if the “knew that the benefit payment or payments were or might be materially in excess of the correct amount.” But, Secure 2.0 also provides that a participant is not “culpable” if:
1. they merely believed the benefit payment or payments were or might be materially in excess of the correct amount;
2. they raised the question with an authorized plan representative; and
3. they were told the payment or payments were not in excess of the correct amount.
Secure 2.0 also is a gamechanger as to rollovers -- providing the following relief:
1. If no recoupment of an inadvertent overpayment is sought, the overpayment will still be treated as eligible for rollover (if payment would have been eligible but for the overpayment) and thus, under existing law, would not result in an excess contribution or resulting excise tax.
2. If recoupment of overpayment is sought, the overpayment can be returned to the plan and treated as eligible rollover distribution back into the plan.
The bottom line:
The new overpayment rules are good news for sponsors, plan fiduciaries, and participants alike. But the rules are complicated, and not particularly easy to navigate. And, the DOL and IRS will likely issue guidance in the future that might change current understandings of how the rules work.
Join Sherrie Boutwell and Deborah Fabricant on Thursday, April 27, 2023, from 11am - 12pm PST for our next webinar: Secure 2.0 Corrections/Overpayments to learn more about this topic. You can register here, or by clicking the image below:
If you have any questions about Secure 2.0 overpayment rules, contact a Boutwell Fay attorney at attorneys@boutwellfay.com.