Getting back a small overpayment that shouldn't have been deposited in the first place

[AlbanyConsultant]

The plan sponsor calculates and deposits the employer contribution per pay period.  For this particular participant, they calculated it incorrectly and deposited $30 too much for the 2021 calendar plan year.  Unfortunately, the plan has immediate distributions; by the time we got to do the reconciliation, the participant had terminated and taken a distribution.

Sure, the plan could try and get the money back because it was an excess distribution... but that would be returning money to the plan that didn't belong there in the first place.  Similarly, if the participant balks at returning it, we'd normally instruct the plan sponsor to deposit $30+earnings to the forf account... but, again, that's $30 that shouldn't have been there at all.

Is there any justification for letting this go?  I need a justification because it's an audited plan, so I have to be able to back this up to the audit team.

Thanks.

[Peter Gulia]

I don’t advise anyone here. Some fiduciaries might include in one’s reasoning:

If the plan’s administrator can do so without incurring an incremental expense, the administrator might send a demand letter asking the distributee to restore to the plan the overpaid amount.

If the plan’s trust collects a restored amount, the plan’s administrator might evaluate whether the employer had paid an amount to the plan under a mistake of fact and, if so, whether an amount (adjusted regarding loss or income) must or may be returned to the employer. See ERISA § 403(c)(2)(A)(i) and the governing documents’ provision.

Assuming customary provisions in the plan’s governing documents, a fiduciary might evaluate that it need not sue the distributee for a restoration of the overpaid amount if the fiduciary prudently finds that the value of the claim—discounted by the probability of getting the court’s judgment, and further discounted by the probability of collecting a judgment—is less than the court’s filing fee and the fees and expenses for the plan’s attorneys and their assistants.

Whatever is or isn’t done to correct this error, one hopes a plan’s independent qualified public accountant would see that the error is not material, and not even significant, in the plan’s financial statements.

[Calavera]

Take a look at Rev. Proc. 2021-30. I recall there was something about overpayments under $250. 

[CuseFan]

Doesn't specifically help here but the current legislation being considered will give plan sponsors leeway to not recoup overpayments. Congressional sentiment seems to be that participants should have to cough up corrections to plan sponsor's (or their providers') mistakes, although the context of that is more in the repayment of years of excess pension payments rather than a $30 lump sum excess.

Personal opinion - $30 is immaterial to plan, neither the plan itself nor any participant was harmed as the excess $30 should never have been in there to begin with, so just move on. They could ask for it back, make the plan whole by depositing the $30 from the former participant or the employer, forfeit the incorrect/errant contribution and maybe return to employer (mistake of fact mentioned above) or reduce a future contribution - that's a big circle of professional time costing way more than $30 to get everyone where they already are (except maybe the payee has $30 less).

Sometimes practicality and (im)materiality needs to win out over strict legality.

 

[Peter Gulia]

For anything on which the plan would incur an expense, a fiduciary must incur no more than prudently incurred “reasonable expenses of administering the plan[.]” ERISA § 404(a)(1)(A)(ii), 404(a)(1)(B).

Further, for situations in which an employer volunteers (but has no obligation) to pay the plan’s plan-administration expenses, the employer ought not to be required to incur an expense if it would be imprudent for the plan to incur the expense.

[RatherBeGolfing]

18 hours ago, Peter Gulia said:

Further, for situations in which an employer volunteers (but has no obligation) to pay the plan’s plan-administration expenses, the employer ought not to be required to incur an expense if it would be imprudent for the plan to incur the expense.

Peter, can you expand on this?  The way I read it, I would slightly disagree.  

If it would be imprudent or unreasonable for the plan to pay, it is not an expense that can be paid by the plan.  In that situation, I don't think it matters whether the employer has a contractual obligation to pay or not. 

 

[Peter Gulia]

Thank you for inviting me to explain my point.

I do not mean to refer to courts’ and the Labor department’s distinction between a settlor expense and a plan-administration expense.

Rather, my point is about cost-benefit tradeoffs in a fiduciary’s decision-making.

If a nonsettlor expense otherwise could be proper but a fiduciary’s prudent cost-benefit analysis finds the expense unreasonable, we recognize that a fiduciary must not cause the plan to incur that expense. Yet, recognizing that the plan must not bear an expense does not always mean the employer (or some other person) must bear the expense.

Courts’ and the Labor department’s interpretations of ERISA § 404(a)(1) recognize that a fiduciary need not spend $300 of the plan’s money to pursue the plan’s $30 claim (or even a $249 claim). (This illustration is simplified.)

If ERISA allows a fiduciary to abandon the plan’s claim because the fiduciary prudently estimates that pursuing it likely would not be cost-effective, why should an employer (absent an obligation) be required—or even expected—to pay a plan-administration expense the plan would not bear?

In my view, an individual-account retirement plan’s fiduciary does not breach its ERISA § 404(a) responsibility because it did not require an unobligated employer to pay a nonsettlor expense the fiduciary found would be imprudent for the plan to pay.

I recognize it’s my view, and that there might be no court decision on point.

I would have a different view if the plan’s need to pursue a claim or correction arose because the employer/administrator breached its responsibility to the plan.

[Nate S]

Without all the legal mumbo-jumbo and handwriting b.s.; my prudent, fair-to-all parties, and k.i.s.s.-centric advice would be to classify it as a discretionary QNEC and move on.  1.  It's no longer excess;(winner) so, 2.  There's no overpayment to recoup;(winner) and, 3.  The auditor can't say boo about its legitimacy.(chicken dinner!)

[RatherBeGolfing]

On 8/13/2022 at 12:51 PM, Peter Gulia said:

If ERISA allows a fiduciary to abandon the plan’s claim because the fiduciary prudently estimates that pursuing it likely would not be cost-effective, why should an employer (absent an obligation) be required—or even expected—to pay a plan-administration expense the plan would not bear?

Thank you for your explanation Peter.  I did misread your prior post, and I agree with your view that if ERISA allows a the plan to not pursue a small overpayment on the basis that the cost would outweigh the benefit, the same principle should apply if the employer is is the one responsible would be responsible for the expense.

[BG5150]

On 8/12/2022 at 1:01 PM, Calavera said:

Take a look at Rev. Proc. 2021-30. I recall there was something about overpayments under $250. 

I believe this is the correct answer.

Section 6.02(5)(c) Special exceptions to full correction, recovery of small overpayments.  (e) is similar.

[BG5150]

On 8/13/2022 at 2:10 PM, Nate S said:

advice would be to classify it as a discretionary QNEC and move on.

Wouldn't the plan document have to allow for QNECs other than corrective ones?

[Nate S]

3 hours ago, BG5150 said:

Wouldn't the plan document have to allow for QNECs other than corrective ones?

I would not want to work with any document that says otherwise...

[Bri]

...and heck, if you're amending the plan to code the overdeposit as a QNEC, that amendment could have whatever other language it might need to "justify" the presence of such a QNEC under the plan if it wasn't permitted already. 

(I know Section 6D of an ASC checklist, for instance, allows you to indicate whether any "regular" QNECs beyond fix-the-ADP-test types will exist under the plan.)

[BG5150]

On 8/13/2022 at 2:10 PM, Nate S said:

would be to classify it as a discretionary QNEC and move on

Hopefully it's a NHCE

[BG5150]

52 minutes ago, Bri said:

(I know Section 6D of an ASC checklist, for instance, allows you to indicate whether any "regular" QNECs beyond fix-the-ADP-test types will exist under the plan.)

Datair has a similar option.  Not sure about Relius of FTW and I'm too lazy to look.  lol

 

[Luke Bailey]

On 8/11/2022 at 10:47 PM, AlbanyConsultant said:

Sure, the plan could try and get the money back because it was an excess distribution... but that would be returning money to the plan that didn't belong there in the first place.  Similarly, if the participant balks at returning it, we'd normally instruct the plan sponsor to deposit $30+earnings to the forf account... but, again, that's $30 that shouldn't have been there at all.

At most they need to send participant a letter saying the amount didn't qualify for rollover.

[AlbanyConsultant]

Yes, it is an NHCE, so if all else fails calling it a QNEC will work (we use Datair's doc).

Appreciate all the input.

[BG5150]

Can you give a QNEC to just one person?