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We have a 401k participant who was accidently paid out twice, in separate calendar years (the assets were pooled).  These were cash distributions, taxes were withheld and remitted to the IRS for both distributions.  1099Rs were prepared for both distributions (2 different years).  The participant has agreed to pay the excess back to the plan.  

How would the plan administrator go about getting the money paid in taxes back from the IRS?  Does the participant pay the entire amount (including taxes) back to the plan and recoups the taxes when he files his amended tax return?

How would we go about reporting this for the participant's records?  For the second distribution he would need to file an amended tax return and a corrected 1099R for that year would be needed as well.  Is that correct?

Thanks for any comments.

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I wouldn't think the participant pays back the withheld taxes, but rather just his 80% amount.

A revised 1099-R would need to be issued, and I'd think the sponsor would amend its 945 filing to illustrate the overpayment of the taxes due.  So that gets the sponsor the credit for the tax amount.  The 1099 shows $0 for the second year, and no withholding "credit" either, for the employee.  I don't know if the EFTPS folks would send BACK to the sponsor the overpayment of federal taxes, but the sponsor should be able to apply that excess against a future amount due for the next guy to be paid out, no?

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The odds of you getting a refund from the IRS as close to zero.  I think Bri in correct if that's the path you and the Participant take.     

But the lawyer in me would advise the Participant that he may not have to pay you back at all

In Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, 136 S. Ct. 651, 193 L. Ed. 2d 556, 577 US 136, (2016), the Supreme Court held that pursuant to 502(a)(3) of the Employee Retirement Income Security Act of 1974 (“ERISA”), a Plan Administrator may not recover overpayments from a Participant’s general assets.  The decision impacts both retirement and health and welfare plans.  So if the Participant has spent the money and it cannot no longer be traced, they you company may find itself bound that that old legal maxis SOL.   

 Richardson v. IBEW, Case No. C19-0772JLR, United States District Court, W.D. Washington, Seattle (2020) overpayments to the Alternate Payee of her share of retirement annuity benefits in accordance with a QDRO were made due to an error made solely by the Plan in computing those benefits. The District court held: 

        "ERISA does not specifically address the ability of plans to recoup." Phillips v. Mar. Assoc.—I.L.A. Local Pension Plan, 194 F. Supp. 2d 549, 555 (E.D. Tex. 2001). However, the Supreme Court directs federal courts to create a body of common law "to fill in the gaps of ERISA." Id. (citing Dedeaux, 481 U.S. at 56; Bruch, 489 U.S. at 110-11)). "When a plan does not specifically allow for recoupment, but nevertheless [the plan] does so, it exercises extra-statutory devices to do so." Id. Thus, when IBEW demanded that Ms. Richardson repay the $130,648.95 overpayment, IBEW—not Ms. Richardson—availed itself of the common law remedy of restitution. See id.; see also Dandurand v. Unum Life Ins. Co. of Am., 150 F. Supp. 2d 178, 184 (D. Me. 2001) ("By recouping the overpayment, [the administrator] has availed itself of the equitable remedy of restitution."). The focus of the court's analysis, therefore, must be on whether IBEW is entitled to rely on this doctrine. See Phillips, 194 F. Supp. 2d at 555. As the court explains below, considerations of the equities in this case and ERISA's guiding principles, lead the court to conclude that IBEW is not entitled to avail itself of this equitable remedy under the specific factual circumstances of this case.

        “Courts have considered a variety of factors to determine if equitable principles bar recovery of mistaken overpayments to an ERISA plan beneficiary, including (1) the amount of time which has passed since the overpayment was made; (2) the effect that recoupment would have on that income; (3) the nature of the mistake by the administrator; (4) the amount of the overpayment; (5) the beneficiary's total income; and (6) the beneficiary's use of the money at issue. Knapp, 2013 WL 26051, at (citing Wells v. U.S. Steel & Carnegie Pension Fund, Inc., 950 F.2d 1244, 1251 (6th Cir. 1991)); see also Bocchino v. Trs. of Dist. Council of Ironworkers of N. N.J., No. Civ.A. 07-864 PGS, 2008 WL 1844298, at  (D.N.J. Apr. 23, 2008) ("Factors pertinent to review include (1) what disposition the beneficiary has made of the overpayment; (2) the overpayment amount; (3) the nature of the trustees' mistake, e.g. negligence; and (4) the time lapsed since the overpayment was made."); Kwatcher v. Mass. Serv. Emps. Pension Fund, 879 F.2d 957, 967 (1st Cir. 1989), abrogated on other grounds by Raymond B. Yates, M.D., P.C. Profit Sharing Plan v. Hendon, 541 U.S. 1 (2004) ("The trial court should consider whatever factors it may reasonably believe shed light on the fairness of reimbursement, and weigh those factors against the backdrop of general equitable considerations and the guiding principles and purposes of ERISA.").”

And see Zirbel v. Ford Motor Company, No. 20-1149 (USCA, 6th Cir. 2020) discussing Montanile at -
https://scholar.google.com/scholar_case?case=7749864799864234768&q=Zirbel+v.+Ford+Motor+Company&hl=en&lr=lang_en&as_sdt=4,111,126&as_vis=1

In other words, I would explain to my client the your company should pay for it's mistakes.  
 

David

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Thanks to all for the replies.  I don't understand one aspect of this however and maybe you can help me think this through.  Let's say the participant had $5,000 gross distribution, received a check for $4,000 and taxes paid of $1,000.  And since this was a duplicate payment, there was actually a $10,000 gross distribution and $2,000 in taxes.  All in the same plan year.   

The participant pays back the 80% amount of the duplicate distribution which is $4,000.  A revised 1099R is prepared for that year showing...a $6,000 distribution (since the extra $1,000 in taxes is not being repaid from the IRS)?  While that would tie in with what the participant actually received as a gross distribution, it is still $1,000 more than what he should have received. 

And while the employer can file a revised form 945, this would presumably show an extra $1,000 was paid.  But it doesn't sound like the IRS is likely to pay that back either. So the employer can perhaps use that credit towards a future withdrawal/taxes.  Is that correct?

Thanks again.  

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11 hours ago, Santo Gold said:

Thanks to all for the replies.  I don't understand one aspect of this however and maybe you can help me think this through.  Let's say the participant had $5,000 gross distribution, received a check for $4,000 and taxes paid of $1,000.  And since this was a duplicate payment, there was actually a $10,000 gross distribution and $2,000 in taxes.  All in the same plan year.   

The participant pays back the 80% amount of the duplicate distribution which is $4,000.  A revised 1099R is prepared for that year showing...a $6,000 distribution (since the extra $1,000 in taxes is not being repaid from the IRS)?  While that would tie in with what the participant actually received as a gross distribution, it is still $1,000 more than what he should have received. 

And while the employer can file a revised form 945, this would presumably show an extra $1,000 was paid.  But it doesn't sound like the IRS is likely to pay that back either. So the employer can perhaps use that credit towards a future withdrawal/taxes.  Is that correct?

Thanks again.  

 

 

The participant keeps the extra $1,000 and the employer puts the $1,000 back in the plan. There is no credit for future use.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070

 

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