Mistake made in amount paid out to terminated participant

[Guest Suzanne Bernhardt]

What should be done when a plan administrator (TPA) makes a mistake in the trust accounting, and therefore allocates way too much to the participants (pooled account), then pays out a couple of them. Later it is found that the terminated participants were paid out too much money. We are talking about $13,000 to $15,000 too much. Any advise out there?

[Guest earthy]

If this is an ERISA covered retirement plan, the losses to the Plan should be mitigated (to the extent possible) to avoid further investment losses, etc. to the Plan.

Did the plan purchase insurance to cover losses due to misappropriations by fiduciaries? The Plan can be protected from losses in this manner. Note that the fiduciaries actual misappropriation cannot be protected.

See section 410(B)(1) of ERISA; 29 USCA sec. 1110(B)(1)

earthy

[david rigby]

...and the TPA should investigate its own E&O insurance coverage.

[Alan Simpson]

What about going to the participants that were paid out and getting the overpayment back. Yes, I know it is not an easy thing to do but it is the financial responsible one.

Also, how are you going to handle the 1099-R for the distirubtions if you don't get the overpayment back?

[bzorc]

Alan, I have used the get it back from the participant route a couple of times. A letter is issued, saying in effect that upon an audit of the plan, it was determined that you were paid too much, and that if you rolled it over to an IRA, you have a non-allowable IRA contribution subject to excise taxes. This worked in the couple of situations that I had.

For a person who took the distribution in cash, I don't know...

Anyhow, I agree with Pax, the TPA "should" be forking over the lost earnings to the plan.

[R. Butler]

I agree with everyone else that the Plan needs to be made whole as soon as possible.

If the participant doesn't repay than legal action can be brought against that participant. If you do a search on this topic, there is an article referencing AmSouth Bank V Carr. Its an Alabama case where the court ordered not only repayment, but also attorney fees and court costs.