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richard

Additional Benefits Due

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What benefit options do you have to offer a terminated or retired employee who has already received (or is receiving) a benefit if the benefit amount is revised upward due to a calculation error?

What is "legally required" and what is "done practically."

For example, let's say an employee terminated or retired. He has elected to receive his benefit as a lump sum (over $3,500 or $5,000) and it has already been paid. It is discovered that the benefit was understated (due to erronious earnings, for example). Do we give him his additional benefit in the form of a lump sum (based on his previous election) or do we offer him the full range of benefit options as before (life annuity, J&50, etc.) based on the increased benefit?

Does it make a difference if he originally elected his benefit as a life annuity or J&50?

Does it make a difference if the additional benefit amount is "material" (of course, subject to the definition of "material").

Does he need to get addditional spousal consent, if applicable?

Thanks.

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Guest Greg

Unless the second distribution reflects additional accrual (due to rehire, for example), the participant's initial election including spousal consent should govern the second distribution as well. I've seen Plan Administrators pay interest on the second piece to return the plan to the condition it would have been in had the initial distribution been correctly made. This is consistent with IRS guidance related to correcting other types of plan operational defects. While I've used this correction method successfully, I'm not an attorney. I'd be interested in other opinions on this, too.

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Greg's approach doesn't seem fair to the participant. The participant might in fact have chosen a different distribution option if he or she had known the amount would be greater.

I don't see how you can automatically apply the participant's first election to subsequent distributions - especially if the amount of the error is susbstantial.

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The plan is required to pay him the additional benefit that is owed.

The question is then the mechanics of how to do this. The safest course would be to notify the participant of the add'l benefit and have him elect (with spousal consent, if appropriate) how he wishes to receive the benefit.

In practice, if the adjustment is determined within a very short time after the lump sum was paid or after monthly payments started, some practitioners simply make an add'l payment (lump sum or catch up on monthly payments) based on the original election.

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