Overpaid distribution

[ombskid]

Participant leaves the company and requests distribution of plan balance. Broker processes a payout without consulting TPA. With plan sponsor consent the participant is paid out 100%.

Problem is the participant wasn't 100% vested. Any experience getting funds returned so proper amount can be withheld?

[Pam Shoup]

It depends on how the money was distributed.  If the money was rolled over to an IRA/another QP, then you can write a letter to them to explain that the money was not eligible for a rollover and ask for the money back.  

If the money was paid to the participant directly, you should write a letter and ask for it back.  

Once the money is returned, the 1099R will need to be updated.

If the money is not returned by the rollover company/participant, the money is still due back to the plan as forfeiture.  The Plan Administrator or other fiduciary will need to make the plan whole.

 

 

 

[fmsinc]

In Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, 577 US _____ (2016), the Supreme Court held that pursuant to 502(a)(3) of the Employee Retirement Income Security Act of 1974 (“ERISA”), a Plan Administrator may not recover overpayments from a Participant’s general assets.  The decision impacts both retirement and health and welfare plans. 

You can find the decision at https://supreme.justia.com/cases/federal/us/577/14-723/

I think it's implications extend far beyond the facts of that case involving a subrogation claim.  

If the Participant in your case spent the money, the Plan may be SOL.  

See also 

In Brown v. Continental Airlines, Inc., 647 F. 3d 221 (5th Cir., 2011)
https://scholar.google.com/scholar_case?case=4019345202025914766&q=brown+v.+continental+airlines&hl=en&as_sdt=20000003
Continental alleged that a number of pilots and their spouses obtained "sham" divorces for the purpose of obtaining lump sum pension distributions from the Continental Pilots Retirement Plan that they otherwise could not have received without the pilots' separating from their employment with Continental.  The pilots were allegedly acting out of concern about the financial stability of Continental and the fear that the Plan might be turned over to the PBGC and that their retirement benefits would be substantially reduced.   

    By getting divorced, the pilots were able to obtain QDROs from state courts that assigned 100% (or, in one instance, 90%) of the pilots' pension benefits to their respective former spouses.  The Plan provides that, upon divorce, if the pilot is at least 50 years old (as all the pilots in this case were), a former spouse to whom pension benefits are assigned can elect to receive those benefits even though the pilot continues to work at Continental.  (Think “separate interest” annuity allocation.]  The former spouses presented the QDROs to Continental and requested payment of lump-sum pension benefits.  After the former spouses received the benefits, the couples remarried.  

    Continental sought to obtain restitution under ERISA Section 502(a)(3).  The Court of Appeals noted that ERISA § 206(d)(3) limits the QDRO qualification determination to whether the state court decree calls for benefit payments outside the terms of the Plan. It rejected Continental’s expanded reading of § 206, concluding that plan administrators may not question the good faith intent of Participants submitting QDROs for qualification.

    But the opposite may be true in U.S. v. Brazile, No. 4:18CV56 RLW, United States District Court, E.D. Missouri (2018) - that you can find at - 
https://scholar.google.com/scholar_case?case=10011356851935590761&hl=en&lr=lang_en&as_sdt=20006&as_vis=1&oi=scholaralrt&hist=bY5nDLcAAAAJ:14880692104701005079:AAGBfm2qi1_JaXLJvydb4f3quYTnTlLkbA,

where Steven Brazile was convicted of securities fraud and, as part of his plea agreement with the Government, he acknowledged owing restitution in the amount of $3,902,880.85.  The Government imposed a lien against his property and rights to property under 18 U.S.C. § 3613(c).  

    It seems that among Steven’s assets was a pension plan.  Steven’s wife, Lorraine, filed suit for divorce and as part of the settlement the parties agreed to the entry of a QDRO transferring 100% of the plan benefit to Lorraine, thereby putting this asset unavailable for Steven’s restitution obligation.  

        “ In September 2017, probation officers conducted a home visit at Defendants' home and discovered that Steven Brazile and Lorraine Brazile are living together with their children and are raising their kids together as a "family." (Id. at ¶ 28) The Government contends that this demonstrates that the Defendants entered into a "sham divorce" to transfer assets to Defendant Lorraine Brazile that could have been used to pay victim restitution. (Id. at ¶ 29) On January 12, 2018, the Government filed a three count civil Complaint against Defendants alleging fraudulent transfer in violation of 28 U.S.C. § 3304. (Id. at ¶¶ 30-44).”

The case came before the court on Steven and Lorraine’s motions to dismiss or for summary judgment.  The judge allowed the case go forward.    
 

[dmwe]

Mistakes like this happen. The Plan should be made whole sooner rather than later while you make the effort to recover the funds, if possible. I think the broker's on the hook for this one.

[ACK]

This situation is addressed in the EPCRS Rev Proc 2018-52.  The employer must take reasonable steps to have the overpayment returned to the plan, with earnings from the date of distribution.  To the extent it is not repaid, the Employer must make the plan whole. The employer should notify the participant that the overpayment is not eligible for favorable tax treatment (not eligible for rollover).

[ombskid]

Rev Proc 2018-52 is fascinating. Like being on a roller coaster, it keeps referring back to another section.

The employer would like to let the former participant keep the overpayment. The amount is approx $900. Can the employer adopt a retroactive amendment under SCP that provides for 100% vesting for just the period of time that includes this particular participant's tenure - where she was the only non-owner participant?

[ACK]

I would think not.  It may depend on how the plan handles forfeitures.  If forfeitures are supposed to be reallocated, then the problem with letting the participant keep the extra $900 is that it results in $900 LESS of forfeiture reallocation to the other participants, so it is a cut back to them, which is not permissible.  There are only a handful of operational failures that can be corrected via retroactive amendment by SCP - compensation mistakes; hardship/loan failures; and early inclusion of an ineligible employee.  Retroactive amendment for vesting failure is NOT a listed permissible option.

[chc93]

I think that if the employer wants the former participant to keep the overpayment, the employer must make the plan whole by paying the overpayment (with earnings) to the plan.  Is $900 too much for this?

[QDROphile]

If the employer wants to give the former employee $900, then the over-distribution should be returned and the plan made whole in accordance with proper correction principles, the employer can pay $900 in a separate transaction.  Unless it is done this way, the IRS (and state taxing authorities) can assert some tax violation, such as evasion of payroll taxes.  The IRS sees payments in an employment situation first as regular salary or wages.  The taxpayer/employer can be put in the position of showing a payment is something else (which usually has better tax consequences to the taxpayer than ordinary salary/wages).