OVer-distribution from defined contribution plan

[Guest W Kelleher]

Anyone had experience making an over-distribution to a member of a defined contribution plan? If so, how did you get the payment back? Did you hire a collection agency? How did you recover the money if it was rolled over to another plan or IRA?

Thanks for any help you can provide.

Walter Kelleher

kelleher_walter@fsba.state.fl.us

[Alf]

The fiduciaries must attempt to get the money back. A lawsuit is almost never practical. Really, the party who made the mistake should restore the plan under an IRS correction program. I also believe that there is a mechanism to notify the trustee of the receiving IRA or qualified plan that the excess amount is not eligible for rollover if it was a rollover and not paid back.

[Guest Jennifer Reid]

We have found that a simple letter to the participant (with a copy to the IRA institution) (i) explaining that he received and is effectively holding funds that do not belong to him but instead belong to the other participants in the plan and are not, therefore, eligible for tax deferred rollover; (ii) requesting return of the excess funds to the plan's trustee; and (iii) asserting that if the funds are not returned, the trustee will be required to report the error to the IRS, is very successful in getting the funds returned. The mere suggestion of the IRS being informed that he is holding taxable funds that don't belong to him is usually enough to dispell the temptation to keep the money.

[mbozek]

J: I am curious as to how your client would report an error to the IRS? Are your going to revise the 1009-R. How would the excess be reported to the IRS? Would the plan face sanctions for a breach of fiduciary duty? Most plan admin would not want to notify the IRS that they have made an overpayment to a participant. Or is this just a bluff to get the participant to refund the excess.

[RTK]

Question: Is there specific IRS guidance that concludes that an overpayment is not "eligible rollover distribution"?

[Guest Harry O]

I have no problem with issuing a revised 1099-R indicating that the overpayment is not an eligible rollover distribution. I have done it and it gets the deadbeat employee's attention.

What is the fiduciary breach for the act of overpayment? A fiduciary has the duty to discharge its duties with prudence, etc. I would argue that there is no requirement that the fiduciary be error-free (especially if the error does not inure to the benefit of a party-in-interest). But not attempting to get the money back would be a fiduciary breach.

My two cents . . . but if the money is already out the door I would not hesitate to issue a corrected 1099-R. I don't see much of a downside.

[mbozek]

I think the participant could raise a defense of accord and satisfaction in that the decision to elect a distribution was based on the amount that the plan admin represented to be the account balance and the part. relied on that amount as being the correct figure. If the plan admin did not reserve the right to revise the distribution I dont think the plan can ask for any refund since the plan represented the account balance as the correct distribution. Also I dont think there is any authority for a plan admin to revise a 1099 so as to reduce the amount of the distribution after paying the distribution to the participant. I think the 1099 requires that the plan admin state the amount paid to the participant which is the amount the participant received. I think a 1099 can be revised to show the actual amount paid to a part. I do not think a plan admin can revise a 1099 to show that part of the amount is not a distribution from the plan. - What form is used to report the excess? It can only be reported as a disqualifying distribution. Also what is the basis for the excess payment. The fid breach could be the cost of retaining an attorney to recover a disqualifying distribution. By the way how much is the excess? Also isnt paying an amount which is not a distribution a PT?

[Mike Preston]

Aren't there two cases (one in Texas, the other in Florida) where a participant received monies in excess of entitlement under the plan, refused to repay when asked, and had to not only refund the monies but pay the legal fees of the plan that was forced to sue them? Maybe nobody there raised these particular arguments. Then again, maybe they did. I find them non-persuasive. Maybe even ludicrous. But that is just me.

If a 1099 was issued in error (amount of taxable benefit) I find it hard to believe that the right course of action is to not correct it.

I usually agree with your postings but this one I'm wondering if you aren't playing a little devil's advocate.

[mbozek]

are there ? I am still waiting for an answer as to how the plan admin would send a corrected 1099 to the IRS showing that a disqualfiying distributions was paid to a participant under a Qual plan. I think the participant has a valid basis for rolling over the entire amount to the IRA since it was paid to the particpant under qualified plan in a event eligible for a rollover and the particpant relied on the information provieded by the plan admin.

Also the participant should demand an accounting from the plan administrator showing how the excess was determined and how it occurred. The participant should also ask for all correspondence between the plan admin and the advisors, TPA, attorneys, etc to find out their opinon on the excess payment. Some "excess" payments are the result of plan admin failures, e.g., plan changes trustees after a distribution is paid and there is a discrepancy between the assets in trustee's account and plan account balances for which the participants should not be charged.

[KJohnson]

As to the refund claim against the participant--I have two words---

Great West....

[Mike Preston]

All correspondence between the plan and attorneys, advisors, TPA, etc relative to this issue? Right. Are we into discovery already? I'm sure plan counsel will volunteer that a participant has a right to a copy of all of that just by making a simple request. By the way, in what country? Certainly not the US.

I would recommend just modifying the 1099 to reflect the correct amount of the distribution at the same time that the correct amount to be returned is being requested from the participant. Any amount in excess of that is money paid that shouldn't have been paid, and should be returned.

Here's the Texas case:

http://www.ebia.com/weekly/articles/2001/4...10308Scott.html

I can't find the Florida case at the moment with the time available. Maybe later.

[mbozek]

Sending a 1099 will cause taxation to the participant for income tax, penalty tax, excess contribution tax to the participant for which the plan admin will be liable since it is the result of a plan fid. mistake. Tax liability could be 40% or more of the amount involved. The participant has the right to see all correspondence and advice involving the issue because all communication involving determination of plan benefits requires disclosure for which there is no privilege. In re Long Island Lighting Co., 129 F3d 268, Washington -Balt. Newspaper Guild Local 35 v. Washington Star co., 543 f. supp. 906.

[KJohnson]

Mbozek--I think the point that Mike was making is that there is no ERISA duty of dislosure of the types of materials that you are talking about, even upon the request of a participant, unless they are "instruments under which the plan is established or operated" under 104 of ERISA.

Of course if the plan has sued the participant and you are in discovery, then the obligation to respond to relevant discovery and the privilege issue that you raise comes into play.

Mike--I think any case cited that does not take into account the Supreme Court's decision in Great West is a problem. The relief that you can seek in these instances would seem to be the same equitable relief that you could recover in a subrogation case for a welfare plan.

[mbozek]

I think you are missing the point-- If the plan admin wants to demonstrate it has a valid right to the excess amount it should be willing to provide the participant with all documentation showing why there was an excess payment- otherwise how does the participant know a mistake was made. Anyway if the plan admin is going to sue the participant then it should be willing to disclose everything before commencing the action- its called good faith effort to resolve a dispute.

[Mike Preston]

Things must work differently on the East Coast. Good faith does not require providing copies of "all correspondence". It should be enough to provide targeted communication indicating the source and cause in sufficient detail to be understood and verified by the participant or his/her advisors. I've read Great West and I see almost no correlation. In fact, where the monies have been rolled over, the concept of having the monies essentially sitting in a constructive ERISA trust seems closer to the mark than anything else.

I'm not arguing for demanding payment without disclosure or thought. I'm saying that if the payment was bigger than it should have been, the plan has a duty and a right to get it back. If it is still around to be "got back" then a participant that decides to fight the issue had better be prepared to pay some of the legal fees of the plan (a la Primary CareNet v. Scott).

OK, it wasn't a Florida case. It was an Alabama case:

http://www.ebia.com/weekly/articles/2001/4...010524Carr.html

[KJohnson]

Mbozek--I was just responding to your post that " The participant has the right to see all correspondence...." There is no such right under ERISA (outside of discovery in a civil action). Even in discovery, there are certain "exceptions" to the "fiduciary exception" that I believe are discussed by the 9th Circuit in U.S. v. Mett--don't have a cite handy.

[Guest Jennifer Reid]

In an individual account, daily valued environment, with web access to accounts, quarterly statements and account activity history, it is very easy for a trustee to establish the proper amount that represents the "balance to the credit" of the participant. The fact that an error results in more than that substantiated balance being paid to the participant doesn't mean that the amount paid becomes the new account balance for that participant and therefore is eligible for rollover. The phrase we use in our letters ("you are effectively holding funds that do not belong to you but belong to other participants in the plan") is a gentle, but usually effective, way of getting the point across. We are intentially vague about the reporting to the IRS, letting the participant wonder what it is we intend to report, and have never had to revise a 1099, but we certainly would if the money was not returned. In our experience, most people don't want to pay taxes on or keep money they think might be reported to the IRS as stolen. Also, some participants have been more persuaded by the fact that it is not the former employer's money they are in receipt of in error (which doesn't bother them that much), but money that is being held in trust for other participants in the plan.

[Appleby]

Here’s another case ( from plansponsor.com)

SUMMARY

An employer who, in a good faith mistake, overpaid pension benefits to a former employee can recover the overpayment as an equitable remedy, since it was able to trace the funds to a specific source. The US District Court for the Northern District of Illinois held that, although the former employee claimed that she no longer had the overpayment in her possession, “It is undisputed that the alleged overpayment was disbursed into an IRA,” and since funds were subsequently disbursed from that account to a make a downpayment on a house, “the overpayment is thus attributable to the house.”

The details are available at the following URL ( registration required)

http://www.plansponsor.com/pi_type10/?RECORD_ID=20090