Compliance February 12, 2002

IRS Puts Out Overpayment Correction Tips

December 2, 2002 (PLANSPONSOR.com) - Plans which mistakenly overpay annuity benefits from a defined benefit pension over 12 months, over several years, or as a lump-sum distribution now have some government guidance about how the mistake can be properly corrected.

Reported by

Fred Schneyer

In Revenue Ruling 2002-84, scheduled for a December 16 publication in Internal Revenue Bulletin 2002-50, the Internal Revenue Service (IRS) said excess payments to a participant made in a single year can be corrected by reducing the following year’s distributions plus interest.

With excess payments made over several years, future payments to that participant can be actuarially cut by the amount of the excess plus interest, based on the plan’s interest rate factors.

Both methods are consistent with the procedures of the Employee Plan Compliance Resolution System, which allows pension plans to self-correct plan defects, the IRS said.

Because the excess amounts had been included in the participant’s gross income as a result of the miscalculation, only the reduced amount need be included in gross income in the future, the IRS said.

In neither case is the participant eligible for a loss incurred in trade or business under tax code Section 165(a), tax officials said.

The IRS also described a miscalculation resulting in overpayment of a lump-sum distribution from which the participant repays the plan the excess amount plus interest.

The amount was properly included in gross income, but is deductible under Section 165 in the year repaid, subject to the rules of Section 67(a), IRS said.