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Is this Permissible?


Guest Cherry

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Guest Cherry

Recently, my father received a letter from the General Board of Pensions of the church he served for thirty-some years notifying him that due to a recent audit, he had been mistakenly receiving overpayments. Not only has the Board reduced his current payment benefit but they are now requesting that he pay back the amount of the overpayment. The election option my father chose was life plus 100% survivor. Is this action permissible? Once an annuity option is elected, hasn't an irrevocable election been made? It would seem that the position the Pension board is taking is that this is a unilateral, not bilateral, contract. Any advice out there?

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It sounds like the board paid out more than it should have, based on what your father selected (e.g., if they were paying out 16,500 per year, when they should have paid out 15,000 based on his selection of a 100% survivor annuity). That is potentially an operational failure (failure to follow your father's election) and needs to be corrected somehow.

The technical way to correct an error is to put everything back to how it would have been had the error not occurred. That would require that your father restore the overpayment.

However, that rarely happens. The IRS generally works with employers and frequently permits the employer to correct the error -- by having the employer restore the money that was overpaid. But the employer is not necessarily required to do that.

The employer might do nothing. Then you have a 403(B) with an uncorrected operational error. There could be tax consequences to your father and/or your father's payments could probably be reduced even further (e.g., reduced to 14,250 if he has been overpaid for five years and his 403(B) balance is lower than what it should have been at this point because he has been overpaid).

The final resolution depends on whether this is an IRS audit or CPAs plan audit or an operational audit, etc. It also depends on how many employees are involved and what is the incentive to the Board for correcting the problem itself.

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Since the original post stated "church", I assume the audit has nothing to do with the IRS, but is related to some internal (or CPA audit) of the plan records. (Of course, this could be a "church plan" that has elected to be in compliance with ERISA.)

Katherine's advice seems pretty good to this non-lawyer. If your father believes the audit is incorrect, it is very reasonable to request that the pension board provide documentation of why they want to reduce his benefit, with as much detail as possible. He may need a legal representative.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Guest Cherry

Thank you both, Katherine and Pax. The information you provided was very helpful.

Another question, wouldn't the E/O insurance cover an error by the Board of Pensions? Why should my father be penalized for their error? Is there a statute of limitations? The error was recognized last year, however, payments began in 1999.

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Guest STLGiant

E&O may not cover the retirement plan, only the entity itself. It's possible it could be covered, but that would generally require the coverage to extend to include the plan. Generally the only insurance purchased on retirement plans are fidelity bonds against theft, and those for only ERISA plans--which a Church must ELECT into (and most don't). Since the error was on the side of the Church, I'd play that card first--since the pension committee should have recognized the error. Your Dad, not being a pension expert should not have to bear the brunt of an operational error by the employer.

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Guest STLGiant

I just happened to notice your address! There is a VERY sharp pension attorney in your neighborhood by the name of Sal Tripodi, Esq. Sal is a member of the American Society of Pension Actuaries and on the staff at University of Denver Law School, not to mention one of the leading pension law authorities in the country. You can reach him through his internet site at www.cyberisa.com--or perhaps via the phone book!

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There are several legal claims that must be resolved by counsel:

1. Contract rights. the plan doucment must be reviewed to determine whether such action to recover benfits is permitted under the terms of the plan.

2. Promissory estoppel. Under state a benficiary can claim that the plan is prevented from reducing the benefits not because of an overstatement in the accrued benefit because the employee would not have retired had he known the benefit was lower. In effect the employee only retired because of the amount the employer promised as a retirement benefit. However the employee has the burden of proving that retirement was conditioned on the amount promised at retirement.

3. statue of limitations- the period of tirme for recouping the excess benefits may be limited to 6 years or less.

mjb

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