Distribution Overpayments

[FundeK]

I am probably going to have about 100 questions on this topic, but I will start with the following:

Is the Fiduciary responsible for seeking recovery for all overpayments from the plan, no matter how they occurred? I have read through many posts on this topic and found a great deal of information. I read that for overpayments under $100, the fiduciary must notify the party of the overpayment, but is not required to see recovery.

So, does this apply to situations where a dividend was double posted, a price was incorrect at the time of payment, etc. It seems to me that you must attempt recovery and let the participant know that those funds are not eligible for rollover. You must then correct the 1099-R correct?

Does anyone have any comments or insight they would like to share?

[Belgarath]

Well, I wouldn't necessarily say ALL overpayments. For example, if the plan has individual accounts, and when the fund liquidates the account they send the participant an extra amount to which he is not entitled, then I wouldn't necessarily say it is the responsibility of the Plan Administrator to attempt to recover this - it is a fund error, and if the fund wants their money back, they can go after it themselves. But once notified of the error, then I'd agree that a corrected 1099 must be done by the Plan Administrator.

However, in most situations, I do believe the Plan Administrator must attempt to recover the funds, with notification that the excess is not an eligible rollover distribution, corrected 1099, etc.

Rev. Proc. 2003-44, appendix B, .05 (which refers you back to .04(1) and (2))deals with the correction, and only specifies "reasonable steps" to have the overpayment returned. I think there's some exercise in judgement - if the overpayment is 3 dollars, no Plan Administrator is going to go to court to attempt to compel return of the overpayment if the participant refuses. But a letter, and corrected 1099, seem to be the very least that can be done.

It's also worth noting that the Appendix B correction, while an approved correction, is not the ONLY possible method of correction. It's just that other corrections may or may not receive IRS blessing.

[mbozek]

Recovery though law suits is not practical because of cost and ERISA's limitation on recovery as a law in equity which requires the plan to trace the overpayment to specific assets in the participant's possession. If a part. cashes the distribution check in las vegas and spends it at the slot machines there can be no recovery by the plan even if the participant owns a home and has other assets.

[Belgarath]

Mbozek - while I agree that it is usually not practical, sometimes it is. We had a DB plan where a participant was overpaid on a lump sum distribution by 55 thousand dollars. Entire distribution was rolled to an IRA. When participant refused to return it, Plan Administrator hired an attorney, sued, and the funds were returned.

Now, I'm no lawyer, so whether the former participant could have avoided paying this money if he'd had a different attorney, I can't say. But what little I've seen on this subject in the past seems to indicate that there is a fiduciary obligation to attempt to recover overpayments. And I'm inclined to think there may be a fiduciary breach issue if a lawsuit could reasonably be expected to recover all or part of the funds, obviously depending upon circumstances and the amount of money involved.

Watcha think?

[mbozek]

I dont disagree when the distribution can be traced to a specific account of the participant and identified and the amount is significant. However, if the plan cannot identify the funds in assets under the participants control the lawsuit will be dismissed. If the participant spends the excess retirement benefit there can be no recovery by the plan. In a recent case a lawsuit by a plan to recover 100k from the son of a deceased participant who cashed retirement checks for 10 yrs was dismissed because the son admitted that he spent the funds to pay for graduate school and the plan could not locate any pension assets.

My comment was intended to remind Plan admin of the need to identify where the plan assets could be in the particpants possession before commencing a lawsuit. If the funds cannot be identified or located the suit will be thrown out.

[FundeK]

At what point does the fact that the participant/beneficiary is being dishonest/breaking the law?

mbozek, in your example below, did the beneficiary cash the checks for 10 years after the participant died? If so, isn't that illegal whether it traceable under ERISA or not? Can the plan sue based on the fact the the beneficiary was fradulant?

[mbozek]

Yes the payment were made for 10 yrs after the ee died. ERISA only permits actions in equity, e.g., for restitution because of unjust enrichment. In an action in law the aggrieved party gets a judgment against the defendant which allows the seizure of any assets owned by the D. In equity the aggreived party can only recover the specific property which was misappropriated. If the property is not in the possession of the D there can be no recovery from other assets owned by D. The subtle difference between law and equity applies in the case of subrogation of helath care benefits.

[Belgarath]

This is very interesting. I never understood the distinction between an action at law and equity. So does this apply only to ERISA plans? In other words, if an IRA withdrawal is overpaid to me, to the tune of 50,000, then if I blow it in Las Vegas, the IRA custodian can collect from my other assets because it isn't an ERISA plan?

Just making sure I know how to be completely unethical in case I'm ever overpaid...

[mbozek]

It would depend on whether the claim for recovery under state law is based on law or equity. E.g return of an over payment is a claim in equity. The claim can be for damages if the IRA owner is defrauded by a crook as happened to a WSJ columnist a few years ago who was tricked into allowing $400k in IRA assets to be invested with a conman who promptly disappeared. The journalist sued the custodian for breach of fiducary duty for the failure to verify the credentials of the con man before transferring the assets. The Ct held that the custodian was not a fiduciary because its only duty was to follow instructions from the IRA owner.

[FundeK]

mbozek,

I am sorry, but I am not understanding how the son in your example got away with this. Isn't it outright theft? He signed his father's pension checks? Can't the plan sue under some other law? Or, is a plan always required to sue under ERISA. It just seems so wrong if the son got away with this!!!

I do understand the difference between actions in equity and actions in law, but your example just seems so.....well illegal!

[mbozek]

A criminal conviction does not create the right to recovery of excess payments. In this case the son filed for bankruptcy stating that he had spent all of the payments from the plan. Even if the plan can sue the son under state law on the theory that the claim would be for something other than the recovery of excess benefits under ERISA there would be no assets to collect on the judgement to justify the legal fees involved.

[GBurns]

Wouldn't also be true that even if there were identifiable assets a writ of replevin would also have failed if there was sufficient comingling with the other assets?