SECURE 2.0 overpayments

This is in relation to a DC plan, deferral and match sources. The HR individual inadvertently entered a termination date for an active participant. Participant receives a notice from the recordkeeper stating you are eligible for a distribution and participant cashes out 100% of the balance. Participant was 100% vested, age 35, not an owner, not a Key, not an HCE, all funds in the account were correctly calculated.  

Do you think the SECURE 2.0 overpayment rules are cut and dry to let this distribution go without any action by the administrator? Or do you think we are waiting for guidance and should consider following the prior rule? Or maybe would you say this is not the definition of "overpayment" as defined by EPCRS?

Thank you

An overpayment happens when the distributed amount exceeds the amount payable to the participant.  Assuming a 35-year-old is not eligible to take an in-service distribution except in the event of Hardship, this is an operational error:  failure to follow the terms of the plan document in operation.

Under EPCRS, a reasonable correction method must be applied to ensure the participant is restored to the same position they would have been in had the distribution not been processed.

The first line of action is to approach the participant and work with them to restore the value of their account.  If they can't replenish their account, the next line of action is to fire them.  Just kidding . . .

There are a hand full of ways you can skin this cat with the cooperation of the participant, the recordkeeper, and the plan sponsor, but the bottom line is that this is not what SECURE 2.0 is referencing with regard to a benefit "overpayment." 

WCC, you haven't said which type of DC plan this is. If the participant is only entitled to a distribution upon termination of employment and has not in fact terminated, then there is an operational violation of the qualification rules because the plan is making a distribution that is not specifically authorized by the terms of the plan document. Since the IRS has not yet issued any clear guidance on this, I would be loathe to technically treat this as an overpayment just yet. In a sense, it could, perhaps, be considered an overpayment. Under current IRS EPCRS guidance, there are certain things you can do if such a distribution is made, such as demand it back, issue a notice that the distribution cannot be rolled over, etc. Since there is no fraud, if the distribution is not a lot of money, you could, perhaps, not do anything based on the SECURE 2.0 clarification that the fiduciary does not need to pursue the overpayment. You might want to try to send the participant a letter saying, "Oops, you know that check you received? You should not have received it. Please pay us the amount back as soon as possible or contact us to make arrangements to pay it back." The participant just might do so without batting an eyelash. If, however, the amount is more substantial, then you might want to consider other options. 

1 hour ago, rocknrolls2 said:

WCC, you haven't said which type of DC plan this is.

Thanks for the responses. This is a 401k plan with a discretionary match, no profit sharing, individual account balances, daily valued. The plan allows in-service distributions from all sources at age 59.5 or upon termination of employment. 

The provisions of Section 301 of SECURE 2.0 specifically address circumstances in which participants received disbursements in excess of what they were entitled to, not those who hadn't met the conditions that would permit the distribution in the first place.

Further, Section 301(5) provides commentary on the "Effect of Culpability."  Protecting a participant (or hoping the problem will go away) doesn't apply when the participant bears responsibility for the overpayment. 

• Did the recordkeeper notify the participant that they were eligible for a distribution due to the termination of their employment? 
• Did the participant know they were still employed? 
• Did the participant question the validity of the notification? 

Beyond that (and the "we need further guidance" observations that accompany most SECURE 2.0 provisions):  if the document does not provide for in-service distributions prior to age 59 1/2, you have an operational error that is completely separate from whether or not the distribution was substantial enough to pursue recovery.  The terms of the document were not followed.  Unless the account is replenished, that's the error that needs to be addressed.

Remember, SECURE 2022’s § 301 adds two provisions:

Employee Retirement Income Security Act of 1974 § 206(h) [29 U.S.C. § 1056(h)]

http://uscode.house.gov/view.xhtml?req=(title:29%20section:1056%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1056)&f=treesort&edition=prelim&num=0&jumpTo=true

Internal Revenue Code of 1986 (26 U.S.C.) § 414(aa).

http://uscode.house.gov/view.xhtml?req=(title:26%20section:414%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section414)&f=treesort&edition=prelim&num=0&jumpTo=true

Technically speaking, can something be an "eligible rollover distribution" if it's not an eligible distribution in the first place?  

If the guy kept the cash, then that probably eliminates the potential to hold "your rollover is ineligible" over him, I suppose, in an effort to get the funds back.