Employer wants money back. Now what?

[katieinny]

A participant in a DB plan received a large lump sum distribution 3 years ago. Recently, the participant received a letter saying that nearly half of the distribution amount must be returned because there was an error made when the distribution was calculated. After all this time, he is able to return the money.

I know that the plan has an obligation to try to get back the money. However, it is my understanding that the employer is responsible to make the plan whole when it is unable to recoup money from the participant. It is unfortunate that the error was discovered after so many years.

Does the participant have any recourse?

[mbozek]

There are cases stating that miscalculation of retirement benefits is a breach of fiduciary duty because of a failure to follow the terms of the plan. The participant could defend against repayment on the grounds of latches, i.e., unreasonable delay which results in detriment. Separately there could be a claim by the fiduciary against the plan's actuary for negligence or malpractice. I dont think the participant can sue the actuary for the mistake. who are you representing?

[katieinny]

The participant is asking us for guidance.

[QDROphile]

Whatever happend to giving back money that was received by mistake? Your message does not suggest that the recipent was induced to to some detrimrental action by the mistake or is unable to return the mistaken amount.

[katieinny]

We are talking about a participant who, more than 3 years ago, went through the process of trying to determine if he could afford to retire. His decision was based on information provided by the employer. Everything the employer provided gave "X" as the dollar amount that the participant would receive.

The spouse waived her right to the QJ&S benefits based on the lump sum dollar amount the employer provided.

The retiree and his wife have been using those dollars for living expenses for 3 years now. The employer is not asking for a few hundred, or even a few thousand dollars back. The employer is asking for 43% of the money back!

After all this time, I think the employer has a better case against the actuary than he does against the participant.

[Locust]

katieinny - If you're a lawyer, the participant is with the right person, as this is a judgment call requiring good legal judgment. There's not a good and definite answer. In a similar situation with which I am familiar, the company didn't require the retirees to return the money. It was a big plan and it would have put the retirees (who were not at all wealthy) into dire straits, so the company absorbed the loss rather than endure the bad publicity of going after destitute former employees. Obviously, it depends on the facts - how big was the payment and what effect will not getting it back have on the plan's funding, as well as the situation of your participant (is he rich or will his life be ruined?). Sometimes these letters are sent out asking for refunds because of a belief that it is a fiduciary duty to do so, or in order to meet some insurance requirement. Also, it is possible that the actuary or consultant made the mistake and has agreed to cover the loss, but won't pay off until the plan asks for the participant to give the refund. You have to gauge all of this in deciding how to react. Sometimes s simple response ("no") is the best reaction.

[katieinny]

Now, to put the icing on the cake, the employer is saying that the company contributions toward the employee's welfare premiums will be suspended until the amount of the excess distribtution is paid back.

[Guest b2kates]

to jump in, such cut off or threat may be itself be a breach of fiduciary duty, as at best it is the DB plans money and the employer would be the fiduciary of the welfare plan.

It does not seem reasonable that the welfare plan would have a provision permitting the employer to cut off benefits of a participant for obligations "owed" to some entity other than the employer/plan sponsor.

Further as previously stated it seems the participant has multiple defenses to a claim by the DB plan for repayment.

Arguably there could be a claim against the fiduciary that made the miscalculation and the participant could make a cross claim for negligence in the event the plan proceeds to legal action.

[mbozek]

The employer needs to consult with counsel on the feasibility of recovery of the excess if the employee has been spending it down to pay living expenses. The employer cannot recover excess benefits that were spent by the employee. Given the egregious facts that the employee relied on the plan's statement of vested benefits at the time of retirement a court could easily find that the the excess benefits to which the plan was entitled to recover would be reduced dollar for dollar by amounts spent by the employee. In addition, the employee would have a defense of latches for a delay in notifying the employee of the mistake and detrimental reliance since the employee relied on the statement of benefits in electing to retire. Another problem could be that the employer would be required to rehire the employee as a condition to the return of excess benefits since the employer did not provide the agreed upon amount of retirement benefits that was a condition of the employee's retirement. I also dont believe that the employer could reduce its contributions to a separate plan to recover the excess payments. Given the legal issues why is the plan attempting to recover the excess payments from the employee?

[Guest DWL]

It's been a while since I researched this issue, but the last time I did, there were a handful of cases and they were all pretty employer-friendly, on the theory that the participant's right to benefits is based on what the plan says and can't be modified by the employer's error. OTOH, that was before the Great West Life line of cases, so if I were looking at it now I'd wonder if what the plan has is a right to repayment but no way to enforce it. I agree with BKates that the welfare plan offset sounds dubious.

[401 Chaos]

Just looking for any more recent discussion of similar issues on this front but have not found any other more recent posts.

I have been asked by a family friend what might be done where big bank has just contacted her asking for return of $50,000+ in over-paid annuity amounts (plus interest) that started back in 2003. (Apparently, the bank had incorrectly coded her annual annuity amount as the monthly benefit amount.) Her last day of employment with the bank dates back to 1980. Although there is some confusing correspondence dating back to 1981 or so that seems to indicate the annual amount but all the correspondence regarding her benefit amount at time of retirement (i.e., around 2003) clearly indicates a monthly benefit amount.

Of course, all of this money has been spent and participant decided to stop working shortly after age 65 based on the pension benefit. The bank is offering to work out a repayment plan so she can repay the full amount over the next 2 years in lieu of requiring a lump sum repayment. If she does not repay the full amount, the bank will then start reducing the ongoing annuity amounts owed. Because of the size of the overpayment, however, that will presumably result in a complete reduction of future annuity amounts and still leave an additional balance due to the Plan.

I'm guessing that a reduction of the annuity amounts owed is generally permissible here since that's under the same plan. Wonder though if the laches / detrimental reliance argument would be enough to get them to wipe off the overpayment amount yet still continue the annuity payments as the (presumably correct) significantly reduced amount.

[david rigby]

Your facts imply a mistake by the trustee. Is that correct? Is the bank the plan sponsor or the trustee?

If the bank is the trustee (and not also the sponsor), does it have the same rights as the the plan or the plan administrator? Perhaps the PA has standing to adjust/recoup future payments to correct its mistake, but does the trustee have the same standing?

(I don't know, just asking.)

[SoCalActuary]

Your facts imply a mistake by the trustee. Is that correct? Is the bank the plan sponsor or the trustee?

If the bank is the trustee (and not also the sponsor), does it have the same rights as the the plan or the plan administrator? Perhaps the PA has standing to adjust/recoup future payments to correct its mistake, but does the trustee have the same standing?

(I don't know, just asking.)

The bank can do so, and they often do arrange to recover the overpayment as described.

The original poster needs to remember this: they are in possession of much more money or assets than they were entitled to receive. They have no equitable position to demand more overpayment.

[401 Chaos]

Sorry for the confusion. The bank is actually the employer / plan sponsor / plan administrator. They may also be the trustee as well--I'm not sure---but I think the mistake presumably happened in the bank's benefits department.

[mbozek]

Your facts imply a mistake by the trustee. Is that correct? Is the bank the plan sponsor or the trustee?

If the bank is the trustee (and not also the sponsor), does it have the same rights as the the plan or the plan administrator? Perhaps the PA has standing to adjust/recoup future payments to correct its mistake, but does the trustee have the same standing?

(I don't know, just asking.)

The bank can do so, and they often do arrange to recover the overpayment as described.

The original poster needs to remember this: they are in possession of much more money or assets than they were entitled to receive. They have no equitable position to demand more overpayment.

soCal

In a similar case involving overpayment for 9 years due to an error by an employee of the plan, a court denied the plan's motion for summary judgement to recover overpayments by reducing the participants correct benefits by 10% on the grounds that the funds erroneous pension information raised equitable concerns as well as the issue of latches to equitable claims of the participant. See Kaliszewski v. Sheet Metal workers National Pension Fund, 2005 WL 2297309.

At the minimum I would request that the plan provide the full actuarial calculation of how the plan determined the benefits under the plan formula and the cause of the error.

[SoCalActuary]

Your facts imply a mistake by the trustee. Is that correct? Is the bank the plan sponsor or the trustee?

If the bank is the trustee (and not also the sponsor), does it have the same rights as the the plan or the plan administrator? Perhaps the PA has standing to adjust/recoup future payments to correct its mistake, but does the trustee have the same standing?

(I don't know, just asking.)

The bank can do so, and they often do arrange to recover the overpayment as described.

The original poster needs to remember this: they are in possession of much more money or assets than they were entitled to receive. They have no equitable position to demand more overpayment.

soCal

In a similar case involving overpayment for 9 years due to an error by an employee of the plan, a court denied the plan's motion for summary judgement to recover overpayments by reducing the participants correct benefits by 10% on the grounds that the funds erroneous pension information raised equitable concerns as well as the issue of latches to equitable claims of the participant. See Kaliszewski v. Sheet Metal workers National Pension Fund, 2005 WL 2297309.

At the minimum I would request that the plan provide the full actuarial calculation of how the plan determined the benefits under the plan formula and the cause of the error.

That's the excitement of legal practice... getting something you don't deserve by a clever argument.

[mbozek]

Your facts imply a mistake by the trustee. Is that correct? Is the bank the plan sponsor or the trustee?

If the bank is the trustee (and not also the sponsor), does it have the same rights as the the plan or the plan administrator? Perhaps the PA has standing to adjust/recoup future payments to correct its mistake, but does the trustee have the same standing?

(I don't know, just asking.)

The bank can do so, and they often do arrange to recover the overpayment as described.

The original poster needs to remember this: they are in possession of much more money or assets than they were entitled to receive. They have no equitable position to demand more overpayment.

soCal

In a similar case involving overpayment for 9 years due to an error by an employee of the plan, a court denied the plan's motion for summary judgement to recover overpayments by reducing the participants correct benefits by 10% on the grounds that the funds erroneous pension information raised equitable concerns as well as the issue of latches to equitable claims of the participant. See Kaliszewski v. Sheet Metal workers National Pension Fund, 2005 WL 2297309.

At the minimum I would request that the plan provide the full actuarial calculation of how the plan determined the benefits under the plan formula and the cause of the error.

That's the excitement of legal practice... getting something you don't deserve by a clever argument.

It more satisfying than being an an escape artist actuary who wants to be immunized from liaiblity for mistakes that cost the plan money. I know a plan sponsor who sued an actuarial firm that calculated excess plan benefits for all plan participants when aDB plan was terminated which resulted in the plan getting a lower refund. The actuaries blamed the employer/HR for not reviewing the calculations which where I come from is called Chutzpah. It took a while but the employer received a satisfactory settlement.

I dont see any problem under ERISAs rules of equity in limiting the amount of a recovery by the plan due to overpayment to the period available under the statute of limitations that applies for claims filed against a plan, e.g., the applicable state law remedy, say of 4 years subject to a further reduction in the case of financial hardship on the participant.

[SoCalActuary]

That's the excitement of legal practice... getting something you don't deserve by a clever argument.

It more satisfying than being an an escape artist actuary who wants to be immunized from liaiblity for mistakes that cost the plan money. I know a plan sponsor who sued an actuarial firm that calculated excess plan benefits for all plan participants when aDB plan was terminated which resulted in the plan getting a lower refund. The actuaries blamed the employer/HR for not reviewing the calculations which where I come from is called Chutzpah. It took a while but the employer received a satisfactory settlement.

I dont see any problem under ERISAs rules of equity in limiting the amount of a recovery by the plan due to overpayment to the period available under the statute of limitations that applies for claims filed against a plan, e.g., the applicable state law remedy, say of 4 years subject to a further reduction in the case of financial hardship on the participant.

I agree. Nice counter example. Mistakes are the cause of overpayments. But I don't see the statute of limitations argument or the class-warfare argument as justification for misapplication of trust assets where they don't belong.

[Belgarath]

SoCal - while I'm not defending the actuary, I have a recollection that perhaps some E&O policies don't cover if you admit mistake/guilt, so sometimes denying it it part of a complicated legal dance to get your E&O to pay?

[401 Chaos]

Thanks to everyone for their thoughts on this. We are enquiring further about the calculation of benefits and how the mistake was made. Hopefully that may delay the employer's unilateral action of reducing all future benefits down to $0 if they do not recevie repayment.

The participant here is a good person and feels badly that she may have received amounts to which she wasn't entitled but has, of course, relied on the annuity amounts in not only prior actions spending the money but really with respect to timing of her retirement and the house she and her husband purchased. Although we are hopeful we might avoid having to repay any previous amounts, the truth of the matter is that the couple has been retired for several years, are really too old to return to work, and may have to try and sell their house if the annuity payments are reduced to the correct level going forward. As we read the cases, sounds like it would be a very hard argument to claim that they not only should not repay prior overpayments but have relied to their detriment on the amount of the future annuity payment amounts though.

[SoCalActuary]

401chaos - would you please restate those last few sentences. I did not understand the multiple negatives.

Double negatives in sentences can lead to a lot of ambiguity. Could you give us a simpler statement of your position?

[401 Chaos]

SoCal,

Sorry for the confusion. My last post was not so much intended to state a position as to make a general observation. Based on the limited review of caselaw out there, it does seem some courts have been fairly sympathetic to participants who have previously spent distribution amounts in excess of the amounts they should have received and are later contacted by plans seeking reimbursement for those prior distribution amounts. As noted, some courts have specifically indicated that employers are not allowed to reduce future distributons from the same plan in order to recoup the prior overpayments. The courts seem less flexible though on allowing participants to continue to receive the erroneous / greater amounts once a mistake has been discovered.

Here, the individual was supposed to receive about $720 per year ($60 per month) but instead received $720 per month. Even if the plan were to forego all the past overpayments and allow the participant to continue to receive the "correct" annuity amounts (i.e., $60 per month) as some of the cases would suggest, the participant is still in a very rough spot because they have not only relied on the mistake with respect to past amounts previously received / spent but also in arranging their retirement expenses for future amounts to be paid. In other words, they decided when to retire, what to spend on their house, etc. based on belief they would have $720 per month rather than $720 per year. It seems likely that it will be much tougher (if not impossible) to make a detrimental reliance argument seeking continued receipt of the erroneous (greater) annuity amounts for the remainder of the participant's life than for the prior overpayments. My point was simply that participants' make very long term plans in reliance on the plan distribution figures they are provided and cannot simply unwind those decisions on a going forward basis if a mistake is discovered.

[Guest bobolink]

I have a recollection of lots of case law that permitted the plan to pursue plan excess distributions if the $$$ could be traced (i.e. if it had been rolled-over to an IRA) but the plan could do nothing but ask for the return of $$$ if it had been sent. Seemed to me a bit of disincentive to save for retirement, but consistent with the laws of equity.

In most cases I've been involved with a pro-forma letter was sent explaining the problem and asking for the $$$ back. Then the employer made whole the plan, either from its own treasury, or from pursit of another party: the reccordkeeper or actuary, who made or contributed to the error.

[SoCalActuary]

We have lots of examples of people who expected a better retirement than they received. Madoff & Stanford ponzi schemes are other examples of this.

In the case of your client, 401chaos, we have a large safety net for those who are destitute. If they cannot rely on their old pension, then they need to take careful stock of their existing resources and make plans that they can live with.

If the answers still come out too low, we have welfare programs they can use. Further, there are charities, relatives, and less expensive living arrangements to consider.

But this is a pension forum, and pension professionals have a lot of reasons to see that exactly (and only) the correct benefits are paid. Fiduciary responsibilities are a highly important part of our daily jobs. I don't see any entitlement to amounts not promised. Further, I see a duty to attempt to collect on misapplied funds. Pension plans don't have a capital structure that includes a margin for errors. All the funds are intended for the participants.

[401 Chaos]

"I don't see any entitlement to amounts not promised. Further, I see a duty to attempt to collect on misapplied funds. Pension plans don't have a capital structure that includes a margin for errors. All the funds are intended for the participants."

SoCal,

Thanks for your response. I do not necessarily disagree with the broader aspects of your statement and, again, was not trying to stake out a position so much as make an observation.

However, I guess I do disagree with you to some degree though in that the individual seemingly was promised the annuity amounts--in the initial pension calculation statements, initial pension election and authorization forms and by way of 7 years of erroneous payments. She's not a client, she's a family friend without significant family resources or any personal safety net to help presently. In short, I just think it sucks that my friend will likely be forced to sell her house (who knows if she even can) in dramatically alter her life at age 73 because of somebody else's mistake. Yes, to allow her to continue receiving the increased amounts would result in a windfall but, to be clear, it is one that she was promised and clearly relied upon. Doesn't forcing her to bear the brunt of that mistake unfairly put the burden on the innocent? What about the individual / company that originally made the calculation mistake, etc. What is their role with respect to the misapplied funds? While you are correct that there are many other innocent victims out there, it strikes me as a bit different where she simply relied on the information and distribution amounts paid to her by the Plan--i.e., she was not taking money and investing with Madoff without due dilligence, etc.

[SoCalActuary]

I appreciate the pain that this causes. Private pensions are often inadequate for a full retirement, and her pension is not much to count on. From my personal experience, I have relatives who live entirely on their Social Security check.

The pension plan can only pay what was in the written contract. That is the nature of defined benefits. The amount is based on a conscious decision of the employer about their ability to pay for the benefits instead of taking the profits for themselves. Employees sometimes pay into the cost of the pension, but in most private plans that is not the case. No one has a liability to pay what was not promised in the terms of the plan document.

Ultimately, the problem still remains at a personal level. These people need to contact their local welfare department, or public service groups like AARP (when they are not just selling insurance) to see how they will cope with the facts.

[mbozek]

I appreciate the pain that this causes. Private pensions are often inadequate for a full retirement, and her pension is not much to count on. From my personal experience, I have relatives who live entirely on their Social Security check.

The pension plan can only pay what was in the written contract. That is the nature of defined benefits. The amount is based on a conscious decision of the employer about their ability to pay for the benefits instead of taking the profits for themselves. Employees sometimes pay into the cost of the pension, but in most private plans that is not the case. No one has a liability to pay what was not promised in the terms of the plan document.

Ultimately, the problem still remains at a personal level. These people need to contact their local welfare department, or public service groups like AARP (when they are not just selling insurance) to see how they will cope with the facts.

While pension plans can only pay the accrued benefit payable under the plan, the courts have and will intervene under the equity provisons of ERISA to prevent financial harship on participants who receives excess pension benefits due to mistakes by plan sponsors.

In Bocchino v. Trustees of District Council Ironworkers Funds, 2009 WL 2038645, a 69 year old participant who expected to receive a benefit of $2800 a month was informed 2 days before retirement that his benefit would be $4000 a month. After he retired the plan discovered the benefit should have been $3200 a month and reduced his benefit accordingly and demanded that he refund $4000 in excess payments.

While the 3rd circuit upheld the denial of the participant's claim to retain the $4000 monthly benefits on the grounds of a fiduciary breach since the participant could not demonstrate the he relied on the erroneous estimate to his detriment, it upheld the disctrict courts decision on equity grounds to allow him to keep the $4000 in excess payments received.

In the case described by 401k Chaos the participant was continually informed over a period of many years of a benefit right up to the date of retirement that was 12 times the benefit actually accrued and then the incorrect benefit was paid for seven years before the mistake was discovered. If there ever was a defense of latches to deny a return of excess benefits this is it since it is more egregeous than the other two cases cited where courts intervened to deny repayment of excess benefits. How much the benefits should be reduced going forward should also be subject to the courts equity powers to prevent hardship to the participant. I dont think having the taxpayers pay for the plan's mistake by giving participant welfare is equitable but then I dont know how CA pays for its welfare benefits.

[SoCalActuary]

I dont think having the taxpayers pay for the plan's mistake by giving participant welfare is equitable but then I dont know how CA pays for its welfare benefits.

CA is the golden state for this type of problem. Once the participant demonstrates that they have insufficient income (which is the fact of this situation because the plan did not promise this benefit under its terms), then our generous system acts to help those at the lowest income levels. However, the person does have to go thru the normal process of finding any other resources like family.