participant damages from overdistribution

[Guest carolyny]

:confused: In 1999 an individual trustee distributed $5,000 excess from a a 401(k) with profit sharing plan and money purchase plan. (Probably was 3-5 separate checks because of the way funds were invested.) The participant didn't realize the amount was in excess of his entitled amount.

When the trustee notified the participant of the error in 2001, the participant agreed that based on prior cases he should return the full amount of the overdistribution to the plan.

What recourse does the participant have against the trustee and plan sponsor because the participant invested the money in good faith and the $5,000 decreased to $1,000. Now the trustee is insisting the participant repay the full $5,000, so the participant has to take $4,000 of his own money to repay the plan.

Any case law or other information to help the participant would be appreciated. My email is lol98@prodigy.net

Thank you for reading this post.

[Guest Ray Williams]

If the participant had made $4000 instead of losing $4000, would the participant then expect to return $9000 to the plan? Why should the Plan, and the other participants in the plan, be responsible of the inept investing of the participant?

[Guest dmj1998]

ray - can you turn that around and ask why should the participant be responsible for the inept recordkeeping of the plan administrator?

if the participant turned $5K into $9K, they would not have a problem giving the original $5K back and keep the earnings. Since they lost $4K instead of making it, it puts them in a more difficult position.

if i were the participant, i would keep the $5K. the trustee can send me a 1099 for the higher amount and i will gladly square up with uncle sam and still be ahead of the game. if anyone wants to take the time to go to court to get me to give back, then i figure out a way to get the other $4k that is needed. of course, i have know idea how you turn $5K into $1K so quickly - and don't tell me because i don't want to know.

[david rigby]

I wonder how the plan assets performed in the same time period.

[KJohnson]

You might want to look at this post.

http://www.benefitslink.com/boards/index.p...t=ST&f=1&t=1472

The Supreme Court's decision a few weeks back in Great West might make it even more difficult for a Plan to recoup payments

[Kirk Maldonado]

The issue here is whether ERISA provides for the type of damages that the participant is demanding.

My recollection is that there are several court decisions involving similar situations, and they say that the participant gets nothing.

[Kirk Maldonado]

KJohnson:

My posting was a bit cryptic, but it wasn't a response to your message; I was raising the broader issue (of the earlier messages) of whether the participant had any claim whatsoever for the "damages" that he claims.

[Guest carolyny]

Thanks for all the responses! Everything I've read says that the participant is required to return the money to the plan.

My question is what kind of recourse does the participant have against the individual who was acting as trustee and the plan sponsor. Their error caused the participant to pay for their mistake "out of his own pocket" to make up for the investment loss.

If the amount and circumstances were such that the participant would have clearly known about the overdistribution, I would agree that he should have been aware that he would be required to return the money. (and not invest it so aggressively)

[Guest carolyny]

Originally posted by pax

I wonder how the plan assets performed in the same time period.

The plan assets as a whole also had large declines over the same period. All the funds are self-directed by individual participants.

[Guest dmj1998]

carolyny - please share the sources that you've read that lead you to believe that the participant has to return anything. i am unclear as to whether or not the $5K has been returned at this time. I agree with KJ that if the participant believes the distribution to be correct, then why would they have to pay it back? If the partic. thought the distribution was too high and still invested the money at all, aggressively or otherwise, then they would have a problem because they would have known they weren't entitled to it. Likewise, if the amount has been paid back already, then the partic. is SOL right now anyway because the trustee will never give it back barring any legal judgement. The amount of money you are talking about is not really significant in the greater scheme of employee benefit plans, but may be a great deal of money to the partic. The question is - would the trustee have been willing to spend 2X or 3X as much in legal costs to get the $5k back?

[Guest carolyny]

According to the recordkeeping firm, the plan sponsor and trustee (owner) feel it is their fiduciary duty to collect the total amount of overdistribution.

Two cases they cited are Primary CareNet of Texas v. Scott, SA-99-CA-0427 OG (W.D. Tex. 2001). This case involved a very contentious participant who received $3,600 too much. The judge granted the motion on summary judgement and then reconsidered and approved an amount for $6,700 of attorneys fees. It appears that the participant was unusually unreasonable and that led to the punitive treatment by the Court. The info provided did not cite how much of the total the $3,600 represented or other specifics.

The other case cited is AmSouth Bank v. Carr, 2001 U.S. Dist. LEXIS 6436 (S.D. ala. 2001). In this case a clerical error resulted in the participant receiving his $34,000 plan balance twice. Of course in this case, the participant would have a hard time explaining that he didn't notice the discrepancy.

Needless to say, the recordkeeping firm didn't provide any of the cases mentioned in the post

http://benefitslink.com/boards/index.php?showtopic=1472

[KJohnson]

Carolyny--I think they are right that it is their fiduciary duty to take reasonable efforts to collect overpayments. However, those reasonable efforts should consider both the cost of recouping and the potential equitable defenses that a participant would have (in addition to a participant's assertion that the remedy sought is money damages and not equitable relief). I believe there are DOL Opinions that say as much--I think 77-08 was the first one that says you have to weigh these types of factors in collecting from participants (I think this also mentions going after the TPA who made the overpayment to recoup).

Thus, I don't believe that a Plan fiduciary has a duty to go after every participant for every dollar of overpayments.

Also you have an operational defect. However, I believe that the IRS's position is that you only have to ask the participant and as long as someone (i.e TPA, Trustee, Sponsor) puts in the missing money you should be able to self-correct. You might want to look at Question 130 on the Correcting Plan Defects Q&A's that are on Benefits Link.

[david rigby]

Link to Index of Q&As as mentioned by KJohnson.

http://www.benefitslink.com/qa_columns/pla...cts/index.shtml

[Mike Preston]

Maybe I'm speaking (typing?) with my heart here, and not my head, but I think the participant should ask a lawyer (pre-paid legal services? brother-in-law?) to forward the participant's check for $1,000 (or whatever the participant believes is "left") to the plan as repayment of the over-distribution. In that letter, the lawyer might gently explain that if the Plan accepts the payment, then the participant will not ask for damages that may result from the participant potentially being liable for taxes on the overdistribution and the resulting excise taxes with respect to depositing (and not withdrawing on a timely basis) funds which were initially not eligible for rollover. Maybe I'm being too kind on the plan, here. In fact, after reading Q&A 130, maybe the participant would be stuck with the taxes on $4,000 so the participant will just keep the $1,000 (thereby making the participant liabile for taxes on $5,000) and turn around and ask the plan for additional funds to make the participant whole! If the participant can't get it from the plan, maybe the participant can get it from the service providers to the plan, who processed the overdistribution to begin with.

Basic fairness (not a particularly strong legal theory, especially in the ERISA area) says that a participant should not be damaged by the plan's error (or the plan's service providers' errors - plural intended) if the participant had little reason to suspect there was an error.

Of course, if there are extenuating circumstances not disclosed so far, like the fact that the participant was in possession of materials that made it clear that the overdistribution had taken place near the time of the distribution, rather than 2 years later, then the participant has nobody to blame but his or herself and should accept the loss and be thankful that there are no cases supporting criminal prosecution for not returning funds known to be in excess of one's entitlement.

By its nature, this is a fact-intensive situation that is not likely to be fully understood here. The participant needs to determine if they were trying to get away with something, or if it could be construed that way by an independent reviewer. If so, the Scott case from Texas is fair warning enough that the penalties for non-cooperation can be steep.

But if the participant is not the guilty party here, I am disgusted that the plan would ask for the full $5,000 back

Strong letter to follow.

[Guest carolyny]

Thank you for your opinion!! I am thinking the exact same thing.

One of the problems is that the individual who serves as trustee of the plan (company president) is known to be a %@*#&!! kind of person and relies on intimidation to bully people.

Shame on the recordkeeping firm who took two years to discover the error. (Especially after they charged the participant $200-$300 to do "Special bookkeeping" to calculate the distribution midyear.)

The actual overdistribution was the trustee's error because the trustee's wife wasn't paying attention to the full amount of the distribution and the many investment sources that were liquidated. I believe the participant got 3 or 4 checks.

In my mind, yet another example of why individuals should be very careful about agreeing to be trustee of a qualified retirement plan.

Thanks for your support and response!

[Mike Preston]

I think the recordkeepers or the plan's fiduciaries may be on very thin ice here. If the plan or the recordkeepers really charged the individual participant for work required to allow the participant to exercise an ERISA "right" then the DOL might be very interested in this case. While it isn't 100% clear that this is what happened, it might get somebody at DOL interested, especially if the bullying can be documented. I have heard of plans charging participants for all sorts of things that the DOL thinks should not be charged directly to them. The DOL takes the position that such charges, if borne by the plan, should be treated as general expenses of the plan and allocated to all participants' accounts. While processing individual distributions in "normal" fashion seems clearly against the DOL's wishes, I've never heard an opinion on whether an "interim valuation" that is requested by a participant can legitimately give rise to a charge directly to the participant. That's an interesting question that the DOL may have an opinion on that I just haven't read about.

The fact that there were special efforts taken on behalf of this individual means that the individual would, in my opinion, have very little reason to doubt the accuracy of the monies forwarded at the time, unless there were materials provided at the time that made it clear an overdistribution had taken place.

So, you have a bit more you can add to that letter from the lawyer.

But I reiterate that it is a very fact intensive situation that could turn on such things as what was really disclosed to the participant at or near the time of the distribution and whether such disclosures push some or all of the responsibility to the participant.

Complicating this is that there may be two paths that the participant will need to traverse, if things get really, really sticky: federal issues and state issues.

If the plan won't be reasonable in the eyes of the participant, then maybe the DOL is contacted for the federal issues and small claims court is contemplated for the state issues? Better have that lawyer I mentioned provide some guidance here!

[david rigby]

"Interim valuation"? I wonder what that is, and if it is permitted by the plan.

I agree with Mike Preston's comment about "thin ice."

[Guest carolyny]

Please explain the issue with charging a participant to calculate his vested balance? I think the document states that the plan is valued at the end of the plan year and distributions are made within 30 days from that date.

In this case they told the participant that he could pay serveral hundred dollars for the extra work and he could receive the money earlier.

Is charging fees to the participant to "expedite" payment a cost of plan administration?

Wow you pension guys are smart. I never thought about that even though I knew you can't charge a distribution fee to a retiree.

[Mike Preston]

This particular issue is somewhat of a thorny one. As I think I stated earlier, there is a general rule that a plan may not directly charge a specific participant who chooses to exercise an ERISA right that exists under the plan. There are a number of published citations on that and, I think, perhaps the best known is a DOL Advisory Opinion indicating that a plan may not charge an individual participant for expenses that are incurred by the plan in conjuction with the approval and processing of a QDRO. I don't have the exact cite at my fingertips but that is the jist of it.

[Here's the cite: http://www.dol.gov/dol/pwba/public/program...ry94/94-32a.htm]

The processing of a "normal" distribution certainly falls into that category and I'm sure the DOL would have problems with a plan charging a participant in order to get a "regular" distribution under the plan.

So part of this revolves around whether or not this was a "regular" distribution or not. In that regard, it sounds like it wasn't. But just because it wasn't "regular" doesn't mean that the plan can charge excessive amounts to a plan participant

Now, the work involved in having the plan process things in a way that is something other than "regular" can be minimal or it might be substantial.

An example of a minimal extra expense might be a case of a distributioin offered by wire transfer in lieu of having a check mailed. I can see where a plan might be able to charge a participant for the expense involved in the wire transfer, because if the employee didn't want to pay the expense associated with the wire transfer, the participant would still have the right to the distribuiton in the form of a check.

An example of a charge that might be substantial is where the plan is re-valued for all participants in order to enable a set of distributions (or a single distribution) earlier than what might otherwise take place. This could be thousands of dollars in some plans.

I don't know whether such a charge could be passed on to the participant in the eyes of the DOL. I am somewhat doubtful.

It sounds like yours is somewhere in the middle.

So the question would be whether the additional charges that were imposed on the participant were the kind that the DOL would think should have been borne by the plan as a whole, rather than charged to the individual.

Another fact intensive based inquiry, which could turn on a number of things. Does the plan offer this to everybody? Or was a special exception made? Is everybody charged the same amount? In the absence of agreeing to pay the additional charge in order to receive the distribution "early", would the participant be denied any of his/her ERISA rights? Is the charge so high that it serves to get in the way of ERISA rights available to most participants (whether or not this participant was willing to pay the charge)?

Again, questions for the lawyer to try to get answered well enough to decide whether to include in the previously suggested letter. Or whether or not to ask the DOL for some support, if the plan is not reasonable with respect to the return of the disputed funds.

Good luck.

[Guest carolyny]

Thanks, you're a wealth of knowledge. Too bad you weren't taking care of the plan we're discussing.

Your clients are lucky to have you.

[KJohnson]

There was a good article today by EBIA discussing the effects of the Great West decision on benefit overpayments. It can be found here:

http://www.ebia.com/weekly/articles/2003/4...403Lumenite.jsp

The court apparently let the case go forward where the funds were directly "traceable" from the plan to an ira and then from the ira to the purchase of a home.

[mbozek]

More important the court held that under ERISA there can be no personal liability of the participant to the plan for the overpayment and the only way for the trustees to recover assets is by tracing the excess funds. Therefore if the overpayments were used for current expenses (e.g., taxes and a vacation) or were lost in the stock market there could be no recovery. If the trustees waited a unreasonable amount of time to assert their claim the participant would also have a defense of laches.