On December 29, 2022, President Biden signed the Consolidated Appropriations Act, 2023 (the budget bill). Division T of the budget bill is the SECURE 2.0 Act of 2022 (SECURE 2.0), which makes numerous changes to the law applicable to qualified pension and profit-sharing plans. Most of the changes are to the Internal Revenue Code (Code), but there are many important changes to the Employee Retirement Income Security Act (ERISA) as well. The changes have varied effective dates and some changes were effective upon enactment. This alert will discuss the changes with respect to the recovery of retirement plan overpayments, which became effective upon enactment. Future alerts will discuss other changes that have similar effective dates.

Immediate Action Needed: Because the changes in law discussed below were effective upon enactment, plan sponsors and plan administrators of plans subject to title I of ERISA should review the procedures and policy for recouping overpayments to see what modifications are needed to comply with the new restrictions on recouping overpayments. Plan administrators and plan sponsors of all qualified plans should take note of the plan qualification and rollover provisions discussed below. The effective date of the changes is December 29, 2022.

Background

When benefit payments to retirees and beneficiaries exceed the amount properly determined under the terms of a plan, the excess payments are referred to as “overpayments.” Sometimes the mistakes in the payment amounts are detected right away, but in other instances the mistakes last for years before they are detected. In some cases, a participant had questioned whether the payment was too great and was assured that the payments were correct only to be told after many years that the payments were mistaken. Plan fiduciaries often feel compelled to seek recovery of the overpayments from retirees, or their beneficiaries, which can place an unexpected burden upon the recipients who are suddenly asked to repay substantial amounts. Numerous court decisions have upheld a fiduciary’s actions to recoup overpayments.

In 2021, the Internal Revenue Service issued Revenue Procedure 2021-30 (Rev. Proc. 2021-30), which was the latest update to the Employee Plans Compliance Resolution Program (EPCRS). Rev. Proc. 2021-30 provided expanded guidance on the recoupment of overpayments, which included situations where no recoupment was needed.¹ However, the expanded guidance was not mandatory and provided no specific relief with respect to fiduciary considerations.

SECURE Act 2.0 Changes

Section 301 of the SECURE Act 2.0 added a new section 206(h) to ERISA and a new section 414(aa) to the Code. These new sections provide special rules applicable to benefit overpayments.

Section 206(h)

Section 206(h) generally provides that a responsible plan fiduciary may exercise discretion not to seek recovery of all or part of inadvertent overpayments. Section 206 further sets forth conditions on the recoupment of overpayments from a participant or beneficiary. The following conditions may restrict the recoupment of overpayments:

• No interest or other additional amounts (such as collection costs or fees) are sought on overpaid amounts for any period;
• If the plan seeks to recoup past overpayments of a non-decreasing annuity by reducing future benefit payments,
  • the reduction ceases after the plan has recovered the full dollar amount of the overpayment,
  • the amount recouped each calendar year does not exceed 10 percent of the full dollar amount of the overpayment, and
  • future benefit payments are not reduced to below 90 percent of the periodic amount otherwise payable under the plan.
• If the plan seeks to recoup past overpayments of a benefit other than a non-decreasing annuity, the plan satisfies requirements developed by the Secretary of Labor;
• Efforts to recoup overpayments generally may not be accompanied by threats of litigation, or made through a collection agency;
• Recoupment of past overpayments to a participant is not sought from any beneficiary of the participant, including a spouse, surviving spouse, former spouse, or other beneficiary;
• Recoupment may not be sought if the first overpayment occurred more than 3 years before the participant or beneficiary is first notified in writing of the error, except in the case of fraud or misrepresentation by the participant;
• A participant or beneficiary is entitled to contest the recoupment pursuant to the claims procedures of the plan that made the overpayment to the extent such procedures are consistent with section 503 of title I of ERISA.

The changes furthermore provide that in determining the amount of recoupment to seek, the responsible plan fiduciary may take into account the hardship that recoupment likely would impose on the participant or beneficiary.

The conditions on recoupment will not apply to protect a participant or beneficiary who is culpable. A participant or beneficiary is culpable if the individual is responsible for the overpayment (such as through misrepresentation or omissions), or if the individual knew that the benefit payment or payments were materially in excess of the correct amount. However, an individual is not culpable merely because the individual believed the benefit payment or payments were or might be in excess of the correct amount, if the individual raised that question with an authorized plan representative and was told the payment or payments were not in excess of the correct amount.

Cheiron Observation: ERISA section 206(h) provides relief for fiduciaries who might otherwise feel compelled to pursue recoupment of overpayments. The law also provides important protections for participants and beneficiaries from plans seeking to recoup overpayments particularly after benefit payments have been made for many years. Plans will need to immediately review their procedures because of the effective date of the new section.

Section 414(aa) and Related Code Changes

New Code section 414(aa) provides that a plan shall not fail to be a qualified plan merely because the plan fails to obtain payment from any participant, beneficiary, employer, plan sponsor, fiduciary, or other party on account of any inadvertent benefit overpayment made by the plan. Also, there is explicit permission for the plan sponsor to amend the plan to increase past, or decrease future, benefit payments to affected participants and beneficiaries in order to adjust for prior inadvertent benefit overpayments.

Section 414(aa) further provides that

• the plan can reduce future benefit payments to the correct amount, or seek recovery from the person or persons responsible for the overpayment;
• nothing in section 414(aa) shall relieve an employer of any obligation to make contributions to a plan to meet the minimum funding standards, or to prevent or restore an impermissible forfeiture;
• a plan needs to observe any limitations imposed by section 401(a)(17) or section 415, and that the plan may enforce such limitations using any method approved for recouping benefits previously paid or allocations previously made in excess of the limitations; and
• regulations or other guidance of general applicability may be issued specifying how benefit overpayments and their recoupment or non-recoupment from a participant or beneficiary are taken into account for any requirement applicable to a plan.

A new section 402(c)(12) provides rules for the transfer of an inadvertent overpayment to an eligible retirement plan. The portion of the overpayment for which recoupment is not sought is treated as having been paid in an eligible rollover distribution if it would have qualified as such but for being an overpayment. The portion of the overpayment for which recoupment is sought can be returned to the plan seeking the recoupment and shall be treated as an eligible rollover distribution transferred by the participant or beneficiary who received the overpayment (and the plans making and receiving the transfer shall be treated as permitting the transfer).

Cheiron Observation: The Code provisions provide helpful statutory protection for plan qualification and go further than the correction methods in Rev. Proc. 2021-30. Thus, for example, section 414(aa) appears to allow a governmental plan to refrain from recouping overpayments without encountering plan qualification issues. Furthermore, the Code provisions provide helpful relief for participants and beneficiaries from potential income tax consequences from the rollover of inadvertent overpayments. Plans should stay alert for any regulations that might be issued to clarify the treatment of overpayments for other Code provisions.

Cheiron pension consultants can assist you in reviewing the changes in plan procedures that may be needed and the financial consequences that may result.

Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Accordingly, we do not provide legal services or tax advice.

¹ See the Cheiron Pension Regulatory Alert of July 22, 2021, for a discussion of the correction of overpayments under Rev. Proc. 2021-30.