Vesting error by Plan administrator - they want money returned

I worked for a company that had their qualified retirement plan at Nationwide.  When i retired i requested a rollover to vanguard.  Nationwide cut me a check for the full balance of the account and I completed the rollover.  Six months later, they claim there was an error in calculating the vesting percentage and want that amount returned.  They have agreed to accept either the dollar amount of the error or the current value of the amount of stock purchased with the error amount.    Assuming I agree that there was an error, my questions are :

1. Has anyone seen this?2

2. Is there a way to correct this which would not involve selling shares of my rollover IRA and creating a taxable event

3. Can I pay this with funds outside of my IRA?  

1)  Yes, asking for an over payment is a legal requirement of the plan.  They are required to protect all participants and those funds will most likely benefit the other participants in the plan.  

2)  If the shares are in an IRA there shouldn't be a taxable event.  The harder part is you need to make sure you do NOT get a 1099-R for the money being sent back to the plan.  I would ask the plan to write a letter to the IRA company to help convince them they need to send the money back to the plan without a 1099-R being issued.  This is most likely going to be the hardest part for you.  The IRA company will not like sending money out of an IRA without a 1099-R being issues.  But this isn't unheard of so they should have a procedure.  The question is does the person helping you know what it is? 

3) The money in the IRA is not a qualified rollover so it can't stay in the IRA. 

Hope that helps. 

I assume they have provided you with documented evidence of their mistake including, for example, the vesting requirements set forth in the Plan documents and the mathematical calculation of your service and vesting percentage from time to time.  And I assume they have figured out a way to repay that money without any tax consequences, or offered to pay your accountant to do so.  

Seriously, however, Plan Administrators have an obligation to recover plan assets.  In other words, payments to you that belonged to other Plan Participants.  The question is whether not allegedly unvested benefits belong to somebody else? It is my understanding that when the unvested portion of an account is forfeited it is placed in the employer's forfeiture account, where it can then be used to help pay plan administration expenses, reduce employer contributions, or be allocated as additional contributions to plan participants.  

Do the plan documents provide for recoupment of allegedly unvested benefits.  Is a payout of unvested benefits akin to an early retirement subsidy, that is, the act of payment results in implicit vesting. 

Suggest that they buy a hat.

A quick one-page retroactive plan amendment fixes your vesting to 100%, at less of a corporate cost than it would be to track you down to repay.  As long as you weren't a Highly Compensated Employee 😜

Would you like a minority view?   The only plans in which an overpayment matters is a DB plan, and even there the agencies suggest that the PA is not required to recoup, and needs to weigh the equities first.   The PA is also supposed to consider the source of the mistake, and attempt to recoup the loss first from whoever is responsible.  vAlso, the plan document and SPD have to make it clear that the plan has a right to recoup - much more easily done when the recoupment involves a third party insurance recovery that the participant is required to provide. The DOL has also suggested that the plan's recoupment effort is a benefit claim denial and the plan needs to send the participant an official compliant claim denial, inform the participant of appeal rights, etc, and let the participant go through the claims process.  The collection is also murky - the plan can't resort to self-help (and probably should not - even if the participant still has an account balance).  Can the plan sue the participant under 502(a)(3) for the overpayment? Can the plan bring a collection action in a state or deferral court?  

Where the mistake involves on going payments, all of the above should apply.  Courts find it easier to reduce future payments to the correct amount, but sometimes balk at making a participant repay the past overpayments for a variety of reasons.

Just sayin.  There are two sides here.

You say that you "retired." If you were at the Plan's Normal Retirement age, you may be fully vested. Check with your prior Employer.

On 8/24/2022 at 4:57 PM, ESOP Guy said:

If the shares are in an IRA there shouldn't be a taxable event.  The harder part is you need to make sure you do NOT get a 1099-R for the money being sent back to the plan.  I would ask the plan to write a letter to the IRA company to help convince them they need to send the money back to the plan without a 1099-R being issued.  This is most likely going to be the hardest part for you.  The IRA company will not like sending money out of an IRA without a 1099-R being issues.  But this isn't unheard of so they should have a procedure.  The question is does the person helping you know what it is? 

MJR, ESOP Guy is giving you very good practical advice here. But note that the Internal Revenue Code also has you covered , i.e., supports what ESOP guy is saying. IRC sec. 408(d)(4) if the distribution and return are in the same taxable year or by due date of return, and 408(d)(5) if the rollover and return of overpayment are in different years. So if you get pushback from the IRA custodian, you can point it to those rules.

14 hours ago, msmith said:

You say that you "retired." If you were at the Plan's Normal Retirement age, you may be fully vested. Check with your prior Employer.

This is a good point.

14 hours ago, Tigerket said:

   The only plans in which an overpayment matters is a DB plan, a

 

 

I would disagree here.  In a DC plan the forfeitures are going to be used for one of two things:

1)  Reallocated as a contribution.  Even a reduce plan it could effect the other participants.  A lot of companies decide what they want their cost to be.  Less forfeitures to reduce means their cost goes up.  In a reduce plan it is possible for the forfeitures simply reduce the cost to the employer but it isn't 100%. 

2) Pay expenses.  Once again less forfeitures and the expenses are going to be paid by the other participants.

In short in a DC plan for a source that is subject to vesting, which is always an ER source, less forfeitures can often times harm the other participants.