How to Handle an Overpayment to a Participant

Through a convoluted series of events one of our participants was overpaid a (to me) substantial amount in the prior plan year.  Without going into detail, both our recordkeeper and our participant share responsibility for the error but I believe the participant was slightly more at fault.  The recordkeeper made a number of attempts to reach out to the participant but one repayment transaction was rejected by their bank and now the participant is no longer responding to requests to discuss.  No action has been taken by the recordkeeper other than the various attempts to contact.  To make it slightly more interesting, the offending transaction was an in-service withdrawal so they remain an active employee so there are HR considerations as well as legal ones.  There is some unrelated evidence that they are in serious financial difficulty.

In response to my oft-expressed concerns that our accounting now shows a negative balance, the recordkeeper made the business decision to make the Plan whole by paying off the negative balance.   Of course I am grateful for this (and appreciate that the recordkeeper is a very ethical organization) but I am troubled by the fact that so far this participant has gotten away with a large sum of money.   It appears that the recordkeeper has made the business decision not to take any more steps to recoup, as the expense of trying to do so might exceed the recovery.  

This is all still evolving and I believe our options are all still open. I have not yet involved legal counsel but am heading in that direction. I believe that, legally at least, the recordkeeper's attempts to recoup from the participant and their decision to make the Plan whole meets the requirements for correction and now that the Plan is whole we are OK from a legal standpoint but I am still troubled and looking for thoughts from people who may have experienced this somewhat unusual situation.   

Is this a DB plan, with future recurring payments?  A DC plan with no future payments?  A DC plan with one or more future payments?

Also, it is the plan's fiduciary's decision to continue or forego attempts to recoup the overpayment on behalf of the plan.

The RK can pursue or not in their administrative function and to mitigate their liability.

This is an individual account plan which is exclusively employee-funded.  The same participant has a vested account in our employer-funded plan but we are well aware that recouping the overpayment from the other retirement plan is a non-starter.

Sounds to me like the record keeper was either instructed to allocate money to the participant in error, or they allocated monies that should have gone to another participant in error.  The record keeper then made the plan whole by funding the amount of the over payment into the plan.  The plan sponsor can either take it as a win, or they can instruct the record keeper to remove the funds they credited and the plan sponsor can deposit the needed funds to make the plan whole.  The  plan sponsor can then pursue through the court system to see if the courts will agree that monies allocated in a record kept account were incorrect and should be repaid by the participant.  If they recoup the legal fees as well as the money, they would be in the same position they are now. 

7 hours ago, EPCRSGuru said:

the recordkeeper made the business decision to make the Plan whole by paying off the negative balance

That act smells like a recordkeeper most concerned with their own liability and not getting sued by the plan, as no matter the fault of the participant, that participant could not have proceeded without the recordkeeper's own error. Whether or not the participant now has a large sum of money they shouldn't have, liability for that lies with the recordkeeper. If their remedial measures meet the requirements for correction such that the plan has no correction or distribution liability, then the participant's status with that property would seem to be a personnel problem for the employer rather than a fiduciary challenge for the plan administration. ERISA's fraud provisions provide the employer with ammunition enough for termination proceedings regarding the employee, but the question remains how the recordkeeper's duty under ERISA to prosecute that potential fraud (rather than ignoring it) impacts plan administration, and for that you should definitely consult plan counsel.

3 hours ago, blguest said:

ERISA's fraud provisions provide the employer with ammunition enough for termination proceedings regarding the employee, but the question remains how the recordkeeper's duty under ERISA to prosecute that potential fraud (rather than ignoring it) impacts plan administration, and for that you should definitely consult plan counsel.

Huh? Please elaborate on the recordkeeper's duty under ERISA. Duty in what capacity? 

Seems important enough to include review by the ERISA attorney for the plan.  I'll bet the recordkeeper has discussed it with its own attorney and/or E&O insurance provider.

@FORMER ESQ. By "prosecute" I meant, as part of their duty of care, to engage, investigate, take on, or pursue, rather than having a duty to file a criminal complaint. Between ERISA, the IRC, SarBox, and SEC rules, recordkeepers exist in a highly-regulated environment requiring constant vigilance to maintain the viability of their liability insurance. If they operate in a fiduciary capacity within ERISA's ambit and do not follow up properly on rectifying their mistakes having overflow effects on plan sponsors and administrators, they risk regulatory, financial, and potential criminal penalties. EPCRSGuru is right to consult with plan counsel.