Incorrect vesting on a death benefit

I have a large plan and the auditor caught the fact that a participant who died 2 months after he was terminated was paid out at 100%. Should have been paid out  40%.  The 2 beneficiaries have already received their money.  Any options other than asking for the non-vested portion back from the beneficiaries, which likely will not work at all? 

Make-whole contribution: The plan sponsor or another responsible entity contributes the amount of the overpayment (with appropriate interest) to the plan in lieu of recouping the amount from plan participants and beneficiaries.  However, the beneficiaries will have to be notified that 60% of their benefit is not an eligible rollover and will be taxable. 

26 minutes ago, Degrand said:

Make-whole contribution: The plan sponsor or another responsible entity contributes the amount of the overpayment (with appropriate interest) to the plan in lieu of recouping the amount from plan participants and beneficiaries.  However, the beneficiaries will have to be notified that 60% of their benefit is not an eligible rollover and will be taxable. 

Thank you, Degrand!

Would it be an option to retroactively amend to provide 100% vesting on death?

15 hours ago, C. B. Zeller said:

Would it be an option to retroactively amend to provide 100% vesting on death?

Could be, but the OP indicates DOD occurred after DOT.  Very unusual, and likely not a good idea, to extend vesting provisions after DOT.  BTW, the title of this thread uses the phrase "death benefit".  Since the severance of employment appears to be what has triggered a distributable event, the plan administrator should make it clear that phrase is not correct.  However, check the plan document! 

If the plan’s administrator that erred is the employer (and it would pay into the plan the mistaken-payment amount):

Are the economic consequence for the employer of retroactively making the benefit nonforfeitable and of not getting restoration from the distributees who received an unentitled benefit not much different (over time)?

13 hours ago, C. B. Zeller said:

Would it be an option to retroactively amend to provide 100% vesting on death?

There is 100% vesting after death, but, he terminated before he died so his original vesting stands. 

So the plan could be amended to read:  "In the event of the death of a participant who has an accrued benefit under the plan (whether or not he is an active participant), 100% of the participant's account balance(s) as of the date of death ..."

Probably, the suggestion for a retroactive amendment was intended to deal only with this participant, so that it does not necessarily extend indefinitely.

Nondiscrimination rules still apply and would likely result in the amendment being applicable to more than this one participant. 

51 minutes ago, Degrand said:

Nondiscrimination rules still apply and would likely result in the amendment being applicable to more than this one participant. 

Likely? Why?

The only vesting errors addressed in EPCRS relate to employees who were paid out too little because of a vesting error. 

In this case, the benes received too much, so it is an overpayment.  Under EPCRS, the correction for an overpayment from a DC plan is to try to have the overpayment repaid to the plan.  If not repaid, the employer must contribute the difference to the plan, adjusted for earnings.  In addition, the Rev Proc does say that an appropriate correction method for an overpayment would be for the sponsor to adopt a retroactive amendment to conform the document to the plan's operations.  However, the amendment must apply to all employees eligible to participate in the plan.  There is a list of reasons in Appendix B for which a retroactive amendment may be made for only specific affected individuals, but I don't think this would qualify.  I think the amendment in this case would have to apply to all employees.

On 6/16/2020 at 3:31 PM, Degrand said:

Nondiscrimination rules still apply and would likely result in the amendment being applicable to more than this one participant. 

Why?  Participants who died on "enter date of death of over paid participant" shall be 100% vested on death. That should probably work, I'm sure there are other ways to word it that would only apply to this participant.  As long as he's a NHCE shouldn't have to worry about discrimination.

I agree that it's probably pretty easy to "target" the affected participant.  However, could there be a 411d6 issue w/r/t such amendment?

4 hours ago, david rigby said:

I agree that it's probably pretty easy to "target" the affected participant.  However, could there be a 411d6 issue w/r/t such amendment?

No.

17 hours ago, david rigby said:

However, could there be a 411d6 issue w/r/t such amendment?

Maybe.  When the IRS reversed course and allowed forfeitures to be used towards safe harbor contributions, our document provider advised that a plan providing that forfeitures increase allocations to participants needed to be amended before participants have satisfied the allocation conditions for receiving the allocation of forfeitures to avoid a 411(d)(6) violation.  Depending on the plan terms and the timing of when the non-vested balance was supposed to be forfeited, 411(d)(6) may be an issue.