Correcting overpayment made after participant's death

[Guest embeem]

A retired participant was receiving a monthly benefit of $1,000 payable as a joint and 50% survivor annuity. The participant died 1/15/2012, but the plan sponsor did not become aware of it until 4/15/2012. For the three monthly installments paid between the participant's death and the plan sponsor becoming aware of the death (2/1/2012, 3/1/2012 and 4/1/2012), benefit payments of $1,000 continued to be sent to and were credited to the (deceased) participant's account (either by direct deposit or someone cashing a paper check). Commencing with the 5/1/2012 installment, payment to the participant ceased and payment of $500 to the survivor commenced).

Had the plan sponsor known of the death in a timely manner, the $1,000 payment to the participant would have stopped after the 1/1/2012 payment and, commencing with the 2/1/2012 payment, the survivor would have received $500, payable for live.

Due to the delay in notification, the plan ended up paying out $1,500 too much over the 3 month period (it paid $3,000 too much to the participant and $1,500 too little to the survivor).

One way to remedy the overpayment (perhaps the technically correct approach) would be for the deceased participant's estate to repay $3,000 to the plan and for the plan to pay the survivor $1,500 ($500 per month retroactive to 2/1/2012).

I am wondering if anyone has had experience with alternative solutions, such as reducing future payments to the survivor. For example, no payments would be made to the survivor until in 8/1/2012. If you have used this offset approach, do you limit it to situations where the survivor was married to the participant at the time of death?

[ETA Consulting LLC]

Due to the delay in notification, the plan ended up paying out $1,500 too much over the 3 month period (it paid $3,000 too much to the participant and $1,500 too little to the survivor).

Unfortunately, this happens often. It's like a 'built in' process failure. The fact that the payments were actually negotiated may warrant an analysis into how they were negotiated (i.e. if directly deposited, did the beneficiary have use of the decedents account).

One way to remedy the overpayment (perhaps the technically correct approach) would be for the deceased participant's estate to repay $3,000 to the plan and for the plan to pay the survivor $1,500 ($500 per month retroactive to 2/1/2012).

Well, assuming that it was the participant's estate and ended up with the payments. But, I totally agree with your approach.

I am wondering if anyone has had experience with alternative solutions, such as reducing future payments to the survivor. For example, no payments would be made to the survivor until in 8/1/2012. If you have used this offset approach, do you limit it to situations where the survivor was married to the participant at the time of death?

Here is where documentation is important. Reducing a future payment to the survivor should be done "only" after you substantiated that the survivor actually received the benefit of the overpayment. Even then, such approach 'may' be questionable, but you would've at least documented the reservation of arbitrarily diminishing the rights of the survivor to cover the ill-gotten gains to the other party.

Nothing you do would be perfect, but it appears as if your approach considers most (if not all) of the relevant principles.

Good Luck!

[MoJo]

Just to add a bit of clarification. If the beneficiary hasn't received the benefit of the overpayments, then the beneficiary is owed the $1500 for the payments missed - without regard to whether the plan can recover the $3000 overpayment made to the participant/decedant (or whomever actually received the benefit of those post death payments). If (and that is a big if) the beneficiary is blameless, I think you have to treat the underpayment and overpayment as two totally unrelated issues.

I agree; however, that if the beneficiary received the benefit of the overpayments, an offset is appropriate.