Terminated Participant Was OverpaidHow Do We "Retrieve" the Overpayment?

[Guest annieap1]

A distribution payment was made to a terminated participant. A clerical error was discovered AFTER the annual report/valuation was sent to the Employer, and AFTER Employer paid participant what was thought to be the vested benefit. After clerical error was discovered, new report was provided to Employer. Revision of Report resulted in a lesser vested distribution to Participant. Trustee (Employer) was directed to contact participant and alert participant of overpayment. Participant refuses to refund overpayment to Trust. Payment was in form of lump sum distribution. I know that there have been Court cases where overpaid participant was forced to return the overpayment to the Trust (in some cases along with Court costs). Participant has engaged attorney who refuses to believe that such suits exist. Help!!! Can anyone give me some citations? I contacted answers @tagdata.com and they cited me a Texas case. Attorney spoofs this.

[david rigby]

You might find value in prior discussions. Try the Search feature, using the word "overpayment".

[mbozek]

How much are you talking about? Your problem is that you need to retain counsel to deal with employee's lawyer. The over payment is called unjust enrichment and yes the plan can recover the amount if it sues the employee but you have to retain counsel to research applicable law.

[alanm]

There is a court case dealing with this issue. A case brought by Chase bank against some participants they paid out by mistake and the court refunded the money to Chase Manhattan Bank. It was in the Second Circuit court I believe, the judges name was District Judge Charles Siragusa, if that helps.

[Guest b2kates]

see Fitch v. Chase Manhattan Bank, 1999 U.S. Dist. LEXIS 13646 (W.D.N.Y, June 17, 1999), I think it will be helpful

[Guest Grabitquick]

Query whether the Supreme Court's Great-West Life decision now makes recovery of a benefit overpayment more difficult, or at least changes the playing field. Great-West limited the ability of plans to collect overpayments in the subrogation context; I wonder if the same rules would apply in this situation, particularly if the amount of the overpayment has already been spent and is not sitting conveniently in an account somewhere.

[Everett Moreland]

See Cooperative Benefit Administrators, Inc. V. Ogden (5th Cir, as revised 4/29/04).

[mbozek]

Fitch did not involve unjust enrichment- It was a suit by employees against the plan to recover the difference between what they were initially told their early retirement benefit would be and what they actually received from the plan.

I dont think Great West has any impact on a claim for recovery of overpayments by a retirement plan under the equitable remedy of restitution because of the unjust enrichment of the participant. Equity will allow the plan to reduce future payments or recover the excess payments to the extent traceable in the participant's account (which is the limit of a remedy in equity). What is not permitted in Equity is a recovery from the participant for money damages (a general claim against all of a person's assets) for the plan's loss because money damages is a remedy in law. In Great West the Sup ct held that a law suit to recover advance payments made by a welfare plan under a subrogation agreement was a remedy in law (i.e., contract) because it was a claim for money damages (a general claim against all of the participant's assets) which is not an equitable remedy permitted under ERISA.

Great West points out that any action by a retirement plan to recover overpayments will be limited to recovery of those assets of the participant (IRA) which can be traced back to the plan distribution because that is all that is allowed under restitution.

[Guest Robin.Wolf]

Appendix B of Rev. Proc. 2003-44 states that the employer "is required to notify the participant or beneficiary that the Overpayment is not eligible for favorable tax treatment accorded to distributions from Qualified Plans (and, specifically, is not eligible for tax-free rollover). See section 6.06(1) for such notice requirements."

"06 Special rules relating to Excess Amounts. (1) Treatment of Excess Amounts under Qualified Plans. A distribution of an Excess Amount is not eligible for the favorable tax treatment accorded to distributions from Qualified Plans (such as eligibility for rollover under § 402©). To the extent that a current or prior distribution was a distribution of an Excess Amount, distribution of that Excess Amount is not an eligible rollover distribution. Thus, for example, if such a distribution was contributed to an individual retirement arrangement (“IRA”), the contribution is not a valid rollover contribution for purposes of determining the amount of excess contributions (within the meaning of § 4973) to the individual's IRA. A distribution of an Excess Amount is generally treated in the manner described in section 3 of Rev. Proc. 92-93, 1992-2 C.B. 505, relating to the corrective disbursement of elective deferrals. The distribution must be reported on Forms 1099-R for the year of distribution with respect to each participant or beneficiary receiving such a distribution. Where an Excess Amount has been or is being distributed, the Plan Sponsor must notify the recipient that (a) an Excess Amount has been or will be distributed and (b) an Excess Amount is not eligible for favorable tax treatment accorded to distributions from Qualified Plans (and, specifically, is not eligible for tax-free rollover)."

"The term "Excess Amount" means (a) an Overpayment...."

"Ther term "Overpayment" means a distribution to an employee or beneficiary that exceeds the employee's or beneficiary's benefit under the terms of the plan...."

In short, it might be easier for the participant to refund the overpayment than to deal with the IRS after the appropriate 1099 filings, etc. have been made.

[Guest Robin.Wolf]

My prior post assumes, of course, that participant rolled over the distribution, or part of it. However, 1099 reporting is affected in either case, I think.

[Guest b2kates]

The last time I had to deal with this type of situation the overpayment, made in error was in excess of 250,000.

we got the Participant to acknowledge the overpayment, and when he refused to return the funds, the Trustee proceeded to file a theft by deception complaint with the local DA.

After educating the DA, and the DA educating the participant as to the consequences, the funds were returned to the plan.

[Kirk Maldonado]

b2kates:

That is a very creative and practical approach. However, my understanding is that you often have to have a significant amount involved in the theft to get the authorities involved. So, while it is a great solution, it will only have limited applicability.

[mbozek]

It also requires that there be an admission by the participant that they are not entitled to the payment which I have never seen. Every participant who receives an excess amount always claims that they are entitled to the money because they received an estimate or statement before retirement which included the overpayment. Prosecutors will not indict employees for overpayments because of an error in calculating the benefit under the plan's formula.