Overpayment of DB Benefit to Plan Sponsor Owner

[Guest Chaffee]

Owner of Plan Sponsor retired in 1999, electing a J&S 75% benefit. Actuary calculated benefit, and used improper J&S factor, overstating benefit by approx. $800/month (cumulative overpayment is approx. $60,000). Issue was noted during my initial audit of Plan (was not detected in previous audits or even in previous IRS audit which specifically looked at benefit calculation).

Other than having to put $60,000 back into the Plan, are there any other correction options available?

I highly doubt it, but could the form of the benefit be changed to a 10 yr C&C or a J&S 50% benefit (with spousal consent to the lower survivor benefit)?

I'm just looking for general corrections people have seen in this situation in the past. The issue will be discussed with ERISA Counsel, but I'm just trying to gather as much input as possible.

Thanks!

Adding a further wrinkle, what if the Spousal Consent Form cannot be located? Absent this consent form, the Plan would revert to a J&S 50% benefit - in which case the Owner would have been UNDERPAID by approx. $25,000. I can't imagine that the IRS would want an additional $25,000 being paid to the Owner for being unable to locate a form.

[mwyatt]

Not sure what you mean by "Spousal Consent Form". Spousal consent isn't required, based upon my understanding of the law, to elect another J&S percentage besides 50% (I'm assuming that the spouse is the contingent annuitant here). Or do you mean you can't find documentation of the owner electing the form of benefit?

[Guest Chaffee]

The Plan designates the Normal Form of Benefit for Married Participants as a J&S 50% Annuity, and any other form would require spousal consent.

The Benefit was paid via a J&S 75% annuity, but paperwork for the election cannot be located. I assumed that a Spousal Consent would be needed since it was other than the "Normal Form", but perhaps it wasn't needed since the J&S 75% is more favorable from the Spouse's perspective.

What I was thinking would be that if no consent or paperwork could be located, would you automatically use a J&S 50% Annuity (in which case, the Participant would have been underpaid)? However, I would still want to have the Spouse consent to the J&S 50% (in case they expected a 75% Annuity and the initial paperwork has just been lost).

Also, if the Actuary presented different payment options with improper amounts, would the Participant be held to the initial election? For example, if the participant selected the 75% Annuity because it was not much less than the 50% annuity (due to the error in calculation), could they revisit the decision given the proper data? If the 75% annuity was presented properly, the participant probably would have elected the 50% annuity because the 75% annuity would have been much lower.

Any thoughts?

[david rigby]

I assumed that a Spousal Consent would be needed since it was other than the "Normal Form", but perhaps it wasn't needed since the J&S 75% is more favorable from the Spouse's perspective.

Although possible, most plans are not worded to require spousal consent when the retiree elects a J&S greater than 50%. Review plan language carefully. You may still have concerns about documenting the election.

w/r/t the original question about overpayment, you will need extraordinarily precise documentation that the wrong conversion factor was used, and what the correct factor should have been. Careful review of the plan as in effect at the date of retirement.

BTW, why was it wrong? Incorrect spouse DOB perhaps? If so, plan administrative provisions may already include information about how/if/when to make adjustment. An error of this magnitude would cause me to be suspicious about every facet of the original benefit calculation.

[Guest Chaffee]

I have reviewed the Plan in effect at the time of retiremnt, and the Tables used were consistently UP-1984 at 6.0%. I don't believe the error was due to the tables, because the Conversion to an Actuarial Equivalent for retirement starting after the NRD were properly based on UP-1984, as was the calculation of the 10 Yr C&C Benefit. (In addition, another benefit calculated on the same date was proper using the UP-1984 Tables).

Trying to work backward from the factors used for the various J&S Options, it does appear that the actuary consistently used a Spousal Age of 63 & 3 months (vs. Actual Age of 55 & 0 months). I am digging to see where the Actuary may have picked up the Older Age for some reasonable explanation.

If I do verify that the error was due to the incorrect Spousal Age, can the Participant (and Spouse) re-evaluate what Option they would have selected? They are using a Corbel Volume Submitter DB Plan, but I wasn't able to find a section explicitly discussing correction when mistakes in calculations are noted. There is general language giving the Plan Administrator power to interpret the provisions and "claims", but this is an odd situation, since the Participant affected is the Plan Admin (as well as Trustee and Plan Sponsor Owner).

In looking at the Benefit Options presented to the Participant several years ago, I can see that the J&S Options were overstated, which put them closer to the 10 yr C&C Option than they should have been. With the correct options, it is reasonable that the Participant may have selected the 10 yr C&C Option.

If the Election is changed, does the Under/Over Payment need to be corrected as a Lump Sum or can future monthly benefits be adjusted?

[Kirk Maldonado]

Here's a really ugly fiduciary responsibility issue to consider.

Given that the trend of the court decisions (following the Supreme Court's decision in Knudson) has been to deny to plan the right to recover those payments, is it a breach of fiduciary duty to use "self-help" to recover those payments (by reducing future benefits)? (The courts have split on this point, but it seems like the majority of the decisions are now following the Knudson analysis.)

I honestly don't have an answer to this because I just thought of the issue.

Is there any provision in EPCRS authorizing self-help to correct overpayments? (I doubt it, but I thought I'd ask.)

In any event, because the determination of whether there was a breach of fiduciary duty arises under ERISA and not under the IRC, I'm not sure how much reliance is justified even if the IRS did authorize self-help in this sitaution.

[david rigby]

IANAL so I will not pretend to have any knowledge of Knudson.

I wonder if there might be a middle ground: don't even attempt to recover "overpayments", but make sure all future payments are correct.

One final thought: Verify whether the current spouse is the spouse at date of retirement.

[mbozek]

Kirk:I dont see a trend that prevents a plan from recovering overpayments by reducing monthly pension benefits. See Ramsey v. Formica Corp, 398 F3d 421, Tynan v. American Airlines, 2005 WL 2203172, Bolone v. TRW Sterling Plan Pension Plan, 2005 WL 1027569, recent cases which have allowed a reduction in future benefits to recoup overpayments. I dont see the fidiciary breach in recovering overpayments by reducing benefits which the plan is entitled to recover under the equitable doctrine of unjust enrichment. In Tynan the court noted the obligation of the Plan admin to recover the overpayments for benefit of the trust and all of its beneficaries.

[Guest Chaffee]

IANAL either, so Knudson is out of my range.

However, I find it hard to believe there is a case NOT to attempt recovery of the "overpayment" in this case, especially since it is an Owner/Plan Admin/Trustee that has received the overpayment.

As mbozek indicates, I believe there is still an obligation to recover such overpayments for the benefit of the Trust.

Am I correct in assuming that such an overpayment would also be a Prohibited Transaction to be reported on Schedule G? If so, is this deemed a "loan" to the overpaid participant?

Ultimately, I am still wondering if there is any basis in the position that the participant may have elected a different option if he had been given the proper benefit amounts at Retirement (i.e. may not have elected J&S 75% instead of J&S 50% or 10 yr C&C). Electing another option, the Participant may actually have been underpaid, thus eliminating the Prohibited Transaction.