SECURE Sec 301 - Overpayment to HCE

[Gilmore]

Would SECURE Sec 301 apply if the overpayment was to an HCE?  Say an employer miscalculates an HCEs match and prior to discovering the error the HCE has terminated and already taken a distribution.  ACP passes so no corrective distributions were due.  Does the fact that the HCE is the only overpayment negate Sec 301, or can the employer allow the HCE to keep the overage assuming no other participants are affected?

Thank you.

[Peter Gulia]

A plan’s administrator, to guide its discretionary decisions about whether to pursue or forbear overpayments, might create, implement, and maintain a set of written procedures.

Whatever discretion ERISA § 206(h) recognizes, a fiduciary must use discretion following everything else in ERISA, including § 404(a) and its implied duty of impartiality.

To supplement a general concept of treating similar situations similarly, one might overlay not favoring highly-compensated employees. But that idea does not by itself mean one must pursue an overpayment merely because the distributee was a highly-compensated employee.

A fiduciary might ask itself a rhetorical question: What would we do in each of the imaginable future situations in which a computation error results in too-much allocations to participants’ accounts?

An administrator should pursue an overpayment if the error was, or resulted from, a failure to apply a limit under Internal Revenue Code of 1986 § 401(a)(17) or § 415. See I.R.C. (26 U.S.C.) § 414(aa)(4).

While it hasn’t happened yet, the Treasury department might restrain some flexibility I suggest. “The Secretary may issue regulations or other guidance of general applicability specifying how benefit overpayments and their recoupment or non-recoupment from a participant or beneficiary shall be taken into account for purposes of satisfying any requirement applicable to a [tax-qualified] plan[.]”. I.R.C. (26 U.S.C.) § 414(aa)(5).

[Gilmore]

2 hours ago, Peter Gulia said:

A fiduciary might ask itself a rhetorical question: What would we do in each of the imaginable future situations in which a computation error results in too-much allocations to participants’ accounts?

In this case, the plan requires last day employment to accrue a match allocation, no exceptions.  The HCE died during the year.  When the Plan Admin calculated the match they did not consider death as being a reason to apply the last day rule.  This is the first time that a participant has died. 

If the plan sponsor amended the plan to allow the death exception to the last day rule going forward, do you think that would be an adequate answer to the rhetorical question of what they would do in the future?

Thank you.

[Patricia Neal Jensen]

I also suggest review of Sec 301 of SECURE 2.0.  The rules concerning recovery of overpayments have been changed (for the better).