Simply Irresistible…To Not Seek Recoupment of Overpayments

by Lyn Domenick

Many retirement plan errors are inadvertent and involve small dollar amounts. However, the work involved in correcting such errors can be time consuming and burdensome. Fortunately, SECURE 2.0 provides that for certain overpayment errors a responsible plan fiduciary can now decide not to seek repayment. While plan fiduciaries are entitled to seek recoupment of overpayments, subject to some limitations, many plan sponsors will welcome this guidance since it allows them to forego seeking recoupment of overpayment errors.

For example, if a 401(k) plan incorrectly included PTO payouts upon termination in eligible compensation, and thus, applied plan contributions to such ineligible portion, the affected participants would probably not notice and in fact might not reasonably be expected to know whether or not the PTO payout should have been included in eligible compensation in their final paycheck. The dollar amounts of the overpayments would in many cases be small and also would include the participants’ own deferrals. In such a case, the plan fiduciary might reasonably choose to not seek recoupment, while correcting the payroll error going forward.

However, if the participant is “culpable” for the overpayment, it would be more prudent for the plan fiduciary to recoup such overpayment. A participant is considered to be culpable if the participant bears responsibility for the overpayment (for example through misrepresentations that led to the overpayment), or if the individual knew that the benefit payment or payments were materially in excess of the proper amount. For example, if a pension plan recipient was fully informed of the amount of monthly pension benefit to expect, but then mistakenly received double payments for many months, the individual clearly should have known that the payments were much too high and should have, at a minimum, notified the plan fiduciary and asked why payments were higher than anticipated. If the individual failed to take this action, then the individual could be deemed culpable for the overpayment error. The plan fiduciary should then immediately correct the benefit payment amount going forward and take additional steps to recoup the overpayment. SECURE 2.0 provides guidelines that restrict the amount that may be recouped from a participant in any given year in addition to other rules that must be followed if the fiduciary attempts to have the affected participant repay.

As with all plan corrections, the plan fiduciary should consult ERISA counsel before taking any correction steps to ensure their approach is sound based on the all the facts and circumstances surrounding the error. The fiduciary should also document the correction steps taken, and the reasoning used, in a self-correction statement to be kept in plan records.