Overpayment of vested benefit to terminated participant

[Guest Lil Anderson]

If a plan Trustee paid a terminated participant too much, can they recover that oveage from the participant? Is the participant legally obligated to return the overage amount? Is there a code section that can be cited?

Thank you for your help.

[Mike Preston]

Lil, this area is very difficult. In general, one would think that over-payments are recoverable. It isn't that simple. First off, the plan must ask this question of ERISA counsel familiar with local court decisions. With that said, the basic rule is that ERISA allows recovery (through a lawsuit) by the plan only if the recovery is "equitable." Various circuits have interpreted that differently and have applied different standards. A lot of this law actually comes from health plans (ERISA plans) that have co-insurance clauses. I think a famous case has "Great West" in the title some where. The general rules are litigated more frequently in the health plan arena, but are applicable to retirement plans, too.

Essentially, I would think that as long as the beneficiary can't claim that they have already spent the money and that it would be inequitable to force them to cough it up, a plan would be successful. However, if, for any reason, a court might decide it would be inequitable, the plan can kiss the recovery goodbye. Examples? OK, how about a plan that is paying $1,500 a month to a participant as a retirement benefit and finds that it should have been paying only $300 a month. We find the participant is 90 years old, has no other assets other than this pension and has no savings and has been receiving this benefit for 25 years. No court in the land would allow the plan to recover (I would hope).

Contrast that against a lump sum of $5,000 "too much" to a participant age 50, who received the lump sum as part of a $500,000 payout, who rolled the money over to an IRA, who has $3,000,000 in other assets and where that IRA still exists (with no other money ever having been deposited). I'd bet on the plan in this case.

My guess is that your circumstances fall somewhere in between.

[Guest mjb]

How much are the overpayments? If is only a few thousand then it will be prohibitive to hire a lawyer to sue.

Second how were the funds paid- lump sum or periodic payments. If a lum sum you will have to trace the funds to locate them in the participant's possession. If the excess funds were spent by the participant, e.g., at the craps table in Vegas, there can be no recovery because ERISA only allows a return of the exact funds that are in the participant's possession when the action commences.

Third how long ago was the excess paid or begun. If the excess payment begain or was made many years ago the cts will not require the repayment under the doctrine of latches, unreasonable delay accompanied by detriment to the employee.

Great West has no application to recovery of excess pension payments because it applies to the doctrine of subrogation (not coinsurnce) where a health plan will advance payments for medical expenses to a plan participant who has been injured because of the action of another person, e.g. auto accident on the condition that the employee will repay the plan when a judgment is paid to the employee in a civil action for the injury. The Sup ct has held that the plan has the absolute right to recover its medical payment against any recovery by the participant.

[Guest Kabert]

A plan sponsor generally has a fiduciary obligation to pay no more than the plan provides. If it pays too much, it generally has a duty to make the plan whole, ideally by getting the funds back from the participant (but, I've seen sponsors make the makeup contribution and I've seen actuaries who were responsible for the erroneous calculation cough up the unrecouped funds). The first step is typically to send a demand letter to the participant explaining the overpayment. If you can't get the money back that way, the next step is to consider a lawsuit. The DOL has said in a series of Advisory Opinions (from 1977) that, if the cost of recovery exceeds the amount owed, the sponsor need not sue and pursue the participant to the ends of the earth.

The IRS has issued guidance (in 2003 or so) describing several methods to recoup qualified retirement plan overpayments, and what the tax implications are. The guidance was not a reg that I recall - it was a Notice or Rev. Rul. or similar standalone guidance. For example, I recall the guidance says the plan can stop paying annuity payments to a participant until the amount of the overage is recouped. There's also a description of the rules in the lump sum overpayment scenario.

As noted above, there is caselaw that a plan can be stopped from recovering overpayments, but I think those cases describe egregious facts. In one that I recall, the plan discovered that it was paying a participant annuity payments that were too high but didn't tell the participant until 5 or 6 years later, after the gross overpayment had grown to $70K or so. There, the court said that laches or estoppel applied to prohibit the plan from getting the money back from the participant.

As was mentioned, this is an area where it may be worthwhile to hire ERISA counsel given the fiduciary issues involved.