Resolving Alleged Overdistribution

[Guest onglaw]

Just got the case of a client who worked for a company with a defined benefit plan. He separated from the employer in 1998 and received a lump sum distribution in 1999 of his account balance (rolled over to IRA). His next employer was later taken over by the same company and he then participated in the same plan from roughly 2000-2003 and then retired. Another lump sum distribution was made of his account balance in 2004 (also rolled-over). The plan reps contacted him by letter in July, 2005 and claimed the second represented an erroneous distribution and demaned a return of the entire balance---providing no detail of accrued benefits. The plan reps waited only 9 days before filing a Federal suit to seek return of the entire second distribution and a restraining order against alienation of the funds. My client doesn't have good personal records to figure this out (there may well be some overlap in the second distribution, but how much??) and is now faced with the expense of defending a federal lawsuit and a hearing on the restraining order in one week.

Questions (1) anyone with any similar experinces and suggetions: (2) was the plan required to attempt some alternate dispute resolution before filing a federal suit?; (3) what is the most efficient way of resolving this matter?

Any thoughts are appreciated.

[alanm]

I'm sure, if asked nicely, the administrator will provide a calculation and reason why the participant is not due the second distribution. You could then ask an independent actuary if it sounds reasonable. If it is reasonable, why not pay back the money rather than fight. The Administrator is probably afraid that if he doesn't move quickly, the money could be spent and lost. Usually the plan will say if the participant lodges a complaint, the administrator can take up to 90 days to respond with a written explaination; here we have the administrator telling you he made a mistake and he is taking steps to get back plan assets. Surely, a phone conversation about how benefits are calculated can solve this problem.

[david rigby]

Documentation, documentation, documentation.

Employer should be willing to describe the "why" and "how much". On the other hand, perhaps that was already done.

[mbozek]

If you are asking those questions you should consider retaining ERISA counsel to advise you. You need to review ERISA 503 and the Dol regs on benefit claims to determine if your client should file a claim for benefits under ERISA for the disputed amount which would require dismissal of the law suit while the participants claim is reviewed by the plan administrator. You should familarize yourself with the requirements for filing a claim and the documents that a particpant is entitled to receive from the plan administrator. If the plan expects to recover the excess then it must provide both the factual basis as well as the plan provisions that would require the return of the payment. The plan can't just state that it overpaid benefits without explaining how the benefit was derived because all benefits must be paid in accordance witth the plan's written formula.

[Kirk Maldonado]

I would wager that there is some bad blood between the employer and the distributee. If that is true, they are probaby out to make the distributee's life as miserable as possible. He shouldn't expect a lot of cooperation from them. My prediction is that they will stonewall him and force him to incur significant legal fees. Even if the case goes to trial and he wins, the company will undoubtedly appeal it, forcing him to pay even more in attorney's fees.

I've seen companies be extremely vindictive towards former employees. Whether their actions were justified or not depends on whose side of the story you believe.

[Guest onglaw]

I read 29 USC 1132(g)(1) to grant a court discretion to award attorney fees to a participant for costs incurred in action "to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan."

If the participant acted in good faith in attempting to resolve a dispute about an alleged overdistribution, it seems this section provides a basis for recovery of attorney fees when the error can be shown to be solely on the plan administrator.

My client was sued to recover an alleged overdistribution without having been given the opprotunity to resolve the question without need for court action.

Am I right on this? Any similar cases on this point?

[mbozek]

I am sure the judge does not want to try this case so your client needs to determine the amount of the excess payments. He could retain an actuary to determine how much he was overpaid and negotiate a settlement. I dont see any reason to be in court if the only question is how much he needs to return- since the money is in an IRA he can send it back to the plan by a rollover.

I dont know what good faith has to do with a defense. ERISA is a law in equity and restitution for unjust enrichment is an equitable remedy. You havent mentoned what defense the employee has to the suit: statute of limitations, promissory estoppel, latches, etc.

I dont understand what happened. Are u saying that ee terminated from employer A and went to work for B and then B was acquired by A and ee received a second distribution form A's plan? Did the overpayment result from the lump sum paid to the employee when he terminated a second time by including credit for service which he recieved in the prior distribution. If so then the overpayment can be determined by calculating the amt of the accrued benefits for both periods of service and subtracting it from the aggregate of the lump sums paid for the two periods of employment. The difference is the amount that is owed to the plan.

[Guest onglaw]

Thanks for the questions, wish I had some answers or information before my client was sued.

You have the factual senerio right, my client has no plan documents or distribution worksheets to make an independent determination as to the accuracy of the distribution amounts. From the limited amount of information that was sent with a demand letter (one week before the suit) it does look like the Plan has understated his years of participation, so their demand for full repayment of the second distribution is off to at least some degree. The clock is running on our detailed document request including all their calculations (not yet 30 days).

My point is that my client has had to retain my firm (and I will most likely have to obtain outside experts on erisa and an actuary) all to get accurate calculations of his benefits----which the plan had the fiduciary duty to properly determine all along.

The cost of even answering a federal lawsuit is not insignificant, even when the denfending party isn't doing anything other than wanting to ensure proper calculations. We are not raising any defenses other than the plan may have to join whoever the TPA or records custodian was who generated the numbers.

It seems fair the the participant shouldn't have to bear these extensive litigaiton costs when the plan messed-up the calculations and/or his records.

Your thoughts/comments.

[david rigby]

He could retain an actuary to determine how much he was overpaid and negotiate a settlement.

The American Academy of Actuaries sponsors a program where an individual may be able to get some pro bono actuarial advice. (I doubt the actuary would be "negotiating".)

http://www.actuary.org/palprogram.htm

[mbozek]

Why not file a counterclaim/crossclaim (or whatever it is called in Fed ct) for an accounting of the benefits owed. Dont know if this is possible in an ERISA case. I dont see why you need to pay for experts before you get information from the plan as to how much was overpaid. The plan has to specificially identify the excess funds that are in your client's possession. The plan can't just demand refund of the excess. This will entail a cost by the plan admin to find the exact amount of the funds in question that are commingled. The plan cannot recover any excess benefits that have been spent by your client.

[Guest onglaw]

My document, records, and calculations request should produce just that type of information---which hopefully will limit the expenses of my outside experts to essentially checking the math. It may be more complex than that due to some predecesor plans, and the need (I believe) to determine the ee's formula under each plan. Again, this is all something the plan admin or TPA should have done.

We have counter-claimed merely for (1) attorney fees and (2) recovery of any adverse income tax penalties attributable to the overpayment. The second is what I call a "protective" counterclaim in that there may not be any adverse tax consequences, but I'm concerned that any overdistribution (which was made in 2004) would not be deemed a qualified distribution entitled to IRA-rollover-----so where does that leave the ee (and the plan for that matter) for 1099 purposes?

I'd like to think that it could be resolved without any adverse tax considerations, but form some limited resources I've seen it looks like any "re-payment" taking place in a different calender year could present some problems?? Am I concerned where I don't need to be?

It seems pretty clear the "burden of proof" is on the plan to put forth the right numbers and supporting records. In the absence of good records, things might get interesting.

Thanks for your insights.

[mbozek]

Why cant repayment be made by a tax free rollover from the IRA to the plan? I dont see how there can be an excess distribution on an amount in the IRA that is in dispute and is returned as part of a settlement agreement after the plan discovers the mistake. If there is no tax reporting of an overpayment by the plan there is no distribution. This should be part of the settlement agreement.

[Guest onglaw]

Is there no issue about any transfer back to the plan taking place in a different year than the initial distribution. I've seen references to any "recision" of a plan distribution must be accomplished within the same calender year, I assume that's was due to accounting and tax reporting issues.

[mbozek]

Recission applies if there is a return of an amount that was included as a taxable distribution in the same yr. My posiition would be that at the time of the distribution in 2004 he received an amount he was entitled to under the plan. It was not until 2005 that it was determined that he had no claim of right to the excess and a return to the plan in 2005 is a recission in the same yr. Why would the plan report the return of the excess as a taxable distribution on a 1099?

[Guest b2kates]

It should be resolvable on a tax neutral basis.

Did you include a counterclaim for frivolous and bad faith.

Have you requested a copy of the SPD, if not provided include a claim for failure to provide - there are statutory penalties

Check the plans administrative procedures.

Stretching there may be a claim for wrongful use of civil proceedings and against the plan sponsor and their attorneys.