Underpayments

[fiona1]

A plan participant retired on his normal retirement date with a $650 monthly benefit. 3 years later it was discovered that the benefit was calculated incorrectly and the corrected monthly benefit amount should have been $700. There are obviously a number of different factors that could lead to this (incorrect compensation used, incorrect service calculations, etc).

The plan sponsor wants to self-correct this failure and follow the EPCRS correction principles in which a full correction will be made, restoring the plan to the position it would have been in had the failure not occurred.

However the plan sponsor is looking for guidance on exactly *how* to correct the failure. They are struggling with whether they just provide a lump sum (with interest) for the $50 per month that was missed over the last 3 years, and then correct the benefit going forward - or whether they actuarially adjust the benefit going forward to make up for the missed payments. They are also wondering if they should allow the participant to elect a new form of payment for the $50 (this doesn't seem necessary). I imagine there are many methods of correcting this failure.

Does anyone know if there is any guidance or a preferred method?

[jpod]

I am not aware of any legal obstacles to the simplest approach, without giving the participant a choice:  Pay a lump sum equal to the missed payments plus some reasonable interest factor.  This would not be an eligible rollover distribution.

Before I do anything I would try to get a sense of whether this was a one-off mistake, or if you've stumbled upon a systemic problem involving several participants and many more dollars.  That could impact resolution.

 

[My 2 cents]

18 hours ago, jpod said:

I am not aware of any legal obstacles to the simplest approach, without giving the participant a choice:  Pay a lump sum equal to the missed payments plus some reasonable interest factor.  This would not be an eligible rollover distribution.

Before I do anything I would try to get a sense of whether this was a one-off mistake, or if you've stumbled upon a systemic problem involving several participants and many more dollars.  That could impact resolution.

 

For greater clarity, describe the catch-up payment as a single amount equal to the missed payments etc.  Calling it a lump sum might lead to confusion. 

I think that paying the accumulated underpayments with interest in a single amount would be a suitable self-correction.  As the participant had retired at NRA, it would not be necessary to consider any options with respect to the ongoing payment option.

To the extent that the issue was more than just for the one person, a formal correction filing might be necessary. 

[CuseFan]

single sum make-up payment with interest at plan's actuarial equivalent rate to the date of correction and then adjusted/corrected payments going forward, not rollover eligible and no other available elections - this is cut and dried.