Too much money distributed.

[katieinny]

Distributions were being made to a participant's beneficiaries for what was supposed to be a 10 year period. However, the checks kept going out for 2 years beyond the 10 year period before somebody discovered the error. Now the employer is asking for thousands of dollars back. Of course, the beneficiaries have been paying tax on it all along.

I understand that the employer has a duty to restore the plan to where it should have been, and in a perfect world the beneficiaries would hand it over. But I have a feeling that in the majority of cases, the employer ends up making the plan whole. Does anyone have any real world experience with this type of situation?

[JanetM]

We had this happen to us couple times. I'm a plan sponsor. Once in DB, I asked for the funds to be returned and as you would expect no money was forth coming. The Company made the plan whole.

Once in DC plan, lump sum was paid twice. Recordkeeper made the plan whole.

I would ask whose fault this is. Who is doing the administration and who is making the payments. Were the payments not stopped due to an error on the part of admin person or was it someone at the back who forgot to put end date?

[R. Butler]

We've had it happen twice in DC plans. Both times we were fortunately able to recover without too much hassle. We wrote the participant on behalf of the client; we included all calculations, explained how the error occurred & provided significant detail.

Once the overpayment was large & the plan sponsor was prepared to take legal action against the participant if necessary. It wasn't necessary & it was never explicitly mentioned, but it did get to a point where plan sponsor's attorney did write a letter also requesting that the money be returned. Again it wasn't a threatening letter, but it did send a subtle message that the plan sponsor was willing to pursue legal action.

[Guest mjb]

Plan administrators frequently demand a return of excess payment from participants or beneficaries with less than 100% results because of 1) difficulty of finding out who actually received the payment and 2) applicable law. The fact that the payment was made in error is not a sufficient basis for a court order a return of the excess payments. Because ERISA is a law of equity the plan must be able to trace the payments to assets in the beneficary's possession. In otherwords if the beneficiary took the funds and used it to pay for expenses or lost it gambling in Las Vegas the plan is out of luck regardless of what other assets are available. Best option is to demand the return of the funds with a postage paid envelope and see what happens. If you sue you will need to retain local counsel which will not be cheap.

Q how much was the amount of the overpayment?

[katieinny]

mjb: We're talking about a large amount -- over $50,000. Because the money has been paid in installments, and went to more than one person, it would much more difficult to track than a lump sum payment.

[Guest mjb]

How do you expect to recover the excess payments if you cant identify the parties who received it and cannot trace the payments to funds held by the payees. The plan must prove that a payee still possesses the funds. If the payees spent the funds for any purpose or the plan cannot trace the funds to their bank accounts there will be no recovery. See Kroop v. Rivlin 2004 WL 2181110 (2004). Under equity only the specific funds paid can be recovered since a judgment for money damages is permitted only in a breach of contract.

[Guest Pensions in Paradise]

mjb - so assuming the plan sponsor cannot recover the excess payments through a civil action, is there anything which prohibits the plan sponsor from filing criminal charges against the participant?

It's hard to imagine that a participant can walk away scott free if he receives an overpayment from a plan.

[Guest b2kates]

Where is the crime? Negligent overdistribution to beneficiary not participant. Plan would be hard pressed to show intent of illegal action, who held a gun to administrator to make inappropriate payment. Does the Plan Administrator have liability insurance?

On limited facts presented, it appears that the employee is left holding the bag if beneficiaries are unwilling to voluntarily return funds.

Also did anyone consider tax consequences to benefiticaries should they return the funds.

[Guest Pensions in Paradise]

I believe in my state this would meet the definition of theft. The illegal action would occur when the participant/beneficiary is notified that they received an overpayment and they fail to return such overpayment. But I'm not an attorney, so what do I know. I'm just old-fashioned. If I received something in error, I would give it back. But sadly I'm a dying breed in this world.

[Guest mjb]

PP: Maybe it would be a crime if you lived in the soviet state but its not a crime to receive an overpayment in the USA. This week a federal appeals court reversed the criminal conviction of investment banker Frank Quattrone because the judge failed to instruct the jury that they had to establish the he intended to obstruct a government investigaton in order to convict him. The court cited the reversal of the conviction of Arthur Anderson last year by the US Supreme Court because of the judge's failure to instruct the jury of the need to have intent to obstruct an investigation in order to convict. In order to charge a crime there has to be criminal intent to commit a crime. Under your analysis all contractual disputes over the amount of money paid would constitute a crime by the person who did not return funds paid to him.

[katieinny]

mjb: I followed up on Kroop v. Rivlin and found the Great West case, too. Thank you for pointing me in the right direction.

[Locust]

mjb - I question your statement that ERISA would require the Plan to trace specific assets in order to recover. Isn't equity on the side of recovery by the plan? If the assets aren't recovered, aren't the remaining participants hurt? The overpayment came from other participants' accounts. The plan has to be reimbursed from somewhere, and the most "equitable" source of reimbursement is the person who cashed the checks. As an analogy - If the plan sold property to a related party for a discount, and the related party then sold it at fmv, wouldn't the related party have to make the plan whole with cash, even though the property is no longer available? I think the equitable principle here is for the person who received the undeserved benefit to make the plan whole.

What is the court's reasoning in Kroop?

Also, what's the problem with finding the persons who got the overpayment? Didn't someone have to cash the check?

[Guest mjb]

If you read the cases cited above you will learn that repayment from the participant's general assets is called money damages which can only be awarded in an action at law, not equity. The equity door swings both ways because it prevents punative, consequential and compensatory domages to be awarded and avoids jury trials. The principles of equity go back hundreds of years, and as benefits lawyers were suprised to learn in the Great west case, subject to intense debate by the Supreme Court over how they applied to ERISA. There are other defenses to a claim for repayment under equity including latches which is unreasonable delay in seeking return of the funds coupled with detriment to the defendant which has preventedv recovery by plans in other cases (failure to discover overpayment for 9 years prevented return of excess payments).

I disagree with your statement that the most equitable soure of repayment is the beneficary who received to funds in good faith from the plan admin and not the party who cause the mistake, eg, trustee, benefits adminstrator or actuary. The plan's right to recovery do not trump the participant's rights under the law.

I dont make this stuff up- The courts set the rules.

[SoCalActuary]

I believe in my state this would meet the definition of theft. The illegal action would occur when the participant/beneficiary is notified that they received an overpayment and they fail to return such overpayment. But I'm not an attorney, so what do I know. I'm just old-fashioned. If I received something in error, I would give it back. But sadly I'm a dying breed in this world.

mjb, I ask that you re-edit this posting to remove all the extra lines of blank space. Thanks.

[Guest anygig]

Given that the new 2008 EPCRS just came out and the IRS stands by its requirement that plans use reasonable steps to recoup overpayments over $100, while federal courts seem to increasingly be applying the requirements listed in Great-West and Sereboff to pension plans (though, as yet, none mention EPCRS), any ideas of where this is going and how far a plan sponsor needs to go to satisfy EPCRS' reasonable steps requirement? How can practitioners state that Great-West and Sereboff are limited to subrogation, given the number of federal pension cases that are popping up (including one by the Eighth Circuit)? In fact, the moderator of a recent EPCRS CLE stated that, though the IRS representative said nothing on the issue. I understand that the IRS' issue is related to plan qualification and the cases focus on participant repayment, but the two issues converge when plan sponsors are trying to figure out what to do about overpayments to participants (unrelated to suspension of benefits issues).

[GBurns]

I personally find this thred very amusing and it brings back memories.

To add to mjb's thoughts:

A few years ago after a heated dispute over my 401(k) balance concerning my ex-employer's plan remittances etc etc, I requested a direct distribution of the total account balance. I picked up the check late one afternoon and to my great surprise the amount was about $ 25,000 too much.

Then I learned that they had called me right after. When I returned the call I was told of the error and was asked to return the check. I asked what was the correct amount and was told that that had not yet been determined and that they did not know when a replacement check would be available. Having had similar experiences before I decided to keep the check then argue. Possession is 9/10th of the law came to mind.

The next morning I was at the bank before it opened. I cashed the check while they were receiving a stop-payment request. I had an old account and personally knew people at this bank branch, so I was given the tip.

I then walked across the street to Merrill Lynch and made a deposit of slightly less than the amount of the check.

I then drew a check on the ML account for more than that amount and deposited in in a Business account as a loan to the corporation. I created loans documents etc.

The Trustee filed suit and requested a Writ of Replevin and the battle started.

The Writ was immediately denied and the judge went to great length to explain why the co-mingling of funds prohibited granting the Writ. He said that the law required that the exact funds be identifiable and/or in my possession.

They then tried Fraud and I think Unjust Enrichment, but were unsuccessful. The Court found that I made no effort to get t he funds, I had no clear means of knowing how much I was supposed to get, that I had made reasonable efforts to find out but was unsuccessful and placed the burden of the error on the Trustee as contributory negligence.

The only concern that I had was when they brought up a previous case where I had done soomething similar with a customer who did not want to pay for merchandise they had received and had shipped out of the country.

I found a humorous similarity to mjb's explanation.

[K2retire]

George,

Am I reading correctly that you got to keep the extra funds (less your defense attorney costs)?

[GBurns]

I got to keep the funds and they paid most of my legal fees, which were minimal. After the initial few hearings my attorneys were of counsel only. I represented my self.

[david rigby]

...the amount was about $ 25,000 too much.

I don't care about the machinations, but it concerns me that you kept something that you knew you were not entitled to. Does this bother anyone else?

[GBurns]

Bear in mind that at the time there was a dispute about missing contributions.

The payment was made without resolving that issue. I requested the account balance not knowing the amount and they sent what they sent. How they calculated that amount was not known.

When asked to return the check they still did not know what the amount should be, which raised the question of How do they know that the amount was wrong and not know what was correct.

Also they could and would not give a time frame for replacing the check.

My choice was to either let them hold the money indefinitely or I should hold the money until resolved.

If they had not immediately placed the stop payment I probably would not have gone through the process in the manner that I did but they started the fight. The stop payment had actually been placed before the telephone conversation.

The fact is that the court found that they acted in bad faith etc.

To some, my ethics might be questionable, but why should I have left myself at their mercy indefinitely? I do not recall that any time during 2 years of court, that they ever came up with or presented a final figure. All they ever did from the start was to want the check back and to **** with my request and my balance.

[K2retire]

I understand your frustration. The small TPA firm that I left in 2005 still owes me money from their PSP. Although I've received distributions of most of it, it is an annually valued pooled account and they don't manage to do the valuation until 11-13 months after the plan year end, so by the time they make the distribution, I am owed another year's earnings. Rumor has it that they had a loss in 2007, so perhaps it will finally end!

[Guest mjb]

...the amount was about $ 25,000 too much.

I don't care about the machinations, but it concerns me that you kept something that you knew you were not entitled to. Does this bother anyone else?

While a participant is not entitled to keep an overpayment there are situations, as GBurns amply illustrates, where a participant is justified in resorting to self help remedies. This dispute could have been resolved easily (as has been discussed in many previous posts) if the plan sent a demand letter to GB notifiying him of the amount of the overpayment and requesting that he remit it. The fact that the plan was unable to determine the correct amount of his distribution after litigation commenced is proof that the plan had no idea of what his actual account balance was and was not entitled to a refund until it could document how is account balance was determined. Lax recordkeeping is no excuse for a plan's inability to value a participant's account balance.

[GBurns]

They never asked for the overpayment at any time in any way.

They refused to address the issue of correct account balance or the request for distribution.

All they ever asked for was that the check be returned or for restitution in the amount of the check.