As we have previously discussed, the SECURE Act 2.0 of 2022 (SECURE 2.0) changed the game for plan sponsors when considering whether and how to recover retirement plan overpayments. The new rules provide welcome relief and much-needed flexibility for many plan sponsors and fiduciaries who felt compelled to attempt to recover many types of overpayments or make the plan whole, even where such recovery or restoration did not materially impact plan funding.
However, the new rules also leave several unanswered questions and have created some additional uncertainty for plan sponsors and fiduciaries. In this post, we explore certain overpayment situations that plan fiduciaries are grappling with under the new rules and discuss how fiduciaries may wish to approach these situations in the absence of additional guidance.
SECURE 2.0’s Impact on the Fiduciary Responsibility to Attempt to Recover Overpayments
Prior to SECURE 2.0, US Department of Labor and Internal Revenue Service guidance generally required fiduciaries to make reasonable attempts to recover overpayments or make the plan whole, depending on the plan’s funding level. ERISA’s fiduciary duty requirements arguably required fiduciaries to review the facts and circumstances of each overpayment, weigh the costs and benefits of recovery, and address the overpayment in a prudent manner.
SECURE 2.0’s overpayment recovery provisions, on the other hand, provide pension plan fiduciaries with a broad fiduciary “safe harbor” of sorts, which allows fiduciaries to decide not to recover an overpayment so long as the failure to recover would not materially affect the plan’s funding and ability to pay benefits.
The new rules appear to provide a complete bar on fiduciary breach claims against a fiduciary that chooses to take no action to collect an overpayment. But many fiduciaries may not feel comfortable taking no action in certain circumstances, such as where the overpayment recipient’s actions caused the overpayment or where the overpayment recipient clearly knew that they were receiving the overpayment (including situations where the recipient is “culpable,” as discussed further below).
In those circumstances, fiduciaries may want to continue evaluating the cost of attempting to collect the overpayment against the likely recovery—including, for example, where there are future pension benefits payable, evaluating whether recovery from those future pension payments presents a low-cost, efficient recovery method.
That said, some fiduciaries are likely to forgo such recoupment efforts under SECURE 2.0, seeing as there could be costs (in terms of time to program the pension reduction and time/expenses for processing a participant appeal) and a risk of future errors (e.g., the failure to program the pension reduction correctly so that it automatically ends when the overpayment is recouped).
So, while SECURE 2.0 appears to provide the fiduciary cover needed to take a variety of approaches to overpayments, many fiduciaries are nonetheless still evaluating each overpayment situation before deciding how to proceed.
Reconciling SECURE 2.0 with ERISA’s Suspension-of-Benefits Rules
One question raised post-SECURE 2.0 is how the restrictions on reducing future benefit payments under SECURE 2.0 will be reconciled with the permitted offsets under ERISA’s suspension-of-benefit rules.
ERISA Section 203(a)(3)(B) provides that a participant’s benefit may be suspended under certain circumstances if the participant engages in disqualifying employment while receiving pension benefit payments. Plans routinely utilize these suspension-of-benefit rules to prohibit so-called “double dipping”—receiving both a paycheck and a pension check in any given month.
In the event of an overpayment in connection with a suspension, regulations at 29 CFR § 2530.203-3 allow a plan to deduct up to 25% of a participant’s monthly benefit payment (and up to 100% of the initial pension payment upon resumption of payments) until the overpayment is recovered. For these types of overpayments, offsetting future benefit payments is often the most efficient and successful means of recovering the overpayment.
Under SECURE 2.0’s new rules, if the plan seeks to recoup past overpayments by reducing future benefit payments, the amount recouped each calendar year must not exceed 10% of the full dollar amount of the overpayment, and future benefit payments may not be reduced to below 90% of the periodic (e.g., monthly) amount otherwise payable to the participant.
Although additional guidance on this issue may be helpful, we view these new limits as not applying to the recoupment of overpayments that are subject to the suspension-of-benefit rules because SECURE 2.0 did not amend or otherwise override the existing suspension-of-benefit rules, which clearly allow for a higher recoupment percentage out of future pension payments.
As a result, if there is an overpayment due to a participant’s work in disqualifying employment, and the suspension-of-benefit rules apply, we think fiduciaries still have the option of recovering the overpayment by reducing the participant’s future pension payments by up to 25% (and up to 100% of the first pension payment that is made following resumption of the pension).
What Constitutes Culpability?
Certain of SECURE 2.0’s overpayment recovery limitations do not apply if the participant or beneficiary who received the overpayment is “culpable,” which is generally defined as bearing responsibility for the overpayment (such as through misrepresentations or omissions that led to the overpayment) or knowing that the benefit payment was materially in excess of the correct amount.
There will be clear examples where culpability is (or is not) present. For example, in the case of a complex pension calculation error, culpability is likely not present for most participants. And culpability may clearly be present in the case of overpayments that were made due to a participant or beneficiary’s misrepresentations, fraud, or forgery.
But we frequently see overpayment situations where culpability is less clear, such as situations where someone other than the participant or beneficiary is the recipient of the overpayment, which frequently occurs if pension payments continue after the participant’s or beneficiary’s death.
For example, suppose a participant dies and the surviving spouse is due a 50% joint and survivor annuity but continues to receive the full pension amount that was payable to the participant. Once discovered, is the surviving spouse “culpable” because they did not notify the plan administrator of the participant’s death and continued receiving the full monthly benefit?
Another example is an adult child who is responsible for managing their parent’s financial affairs and who has no knowledge of the pension plan’s rules. If the plan continues making monthly pension payments through direct deposit to the deceased parent’s bank account and the child uses that account to pay the deceased participant’s/estate’s bills, is the child culpable?
Plan fiduciaries may struggle with these determinations in the absence of further guidance. In our view, a determination that the participant or beneficiary is culpable should not be made lightly, should be based on a complete record that considers all relevant facts, and should err on the side of the participant or beneficiary if there is any doubt.
Stay tuned for further ML BeneBits posts, LawFlashes, and webinars on further guidance and developments related to SECURE 2.0. To receive updates on the latest developments in employee benefits, including insights on SECURE 2.0, subscribe to our mailing list.