You’ve Overpaid Retirement Benefits to a Participant … Now What?

Overpayments are more common than many sponsors think; they should understand the steps they can take to get the money back.

Running a retirement plan is challenging enough. Plan sponsors’ added responsibility of trying to claw back benefit overpayments from participants just adds to the headache, experts say.

However, there are steps sponsors can take to better manage their plan data to prevent overpayments from happening in the first place, and the Internal Revenue Service (IRS) suggests four approaches a sponsor can take to rectify an overpayment if one does happen.

“Overpayments to plan participants are a very pervasive problem that can cost companies millions of dollars each year,” John Bikus, president of PBI Research Services, a provider of death data audits, tells PLANSPONSOR. “Many organizations are relying on internal processes and incomplete data sources to validate deaths of participants.”

Continuing to pay benefits to a deceased person is one of the most common reasons a sponsor overpays benefits, and it is, perhaps, the most troubling because it requires the sponsor to step in to make the plan whole since the recipient is deceased and unable to pay, says Eric Gregory, a lawyer with Dickinson Wright who has written a blog about the options sponsors have to correct overpayments.

The most important step sponsors can take to prevent overpayments of benefits is ensure the data in their retirement plan files is correct, Bikus says. “The best thing that plan sponsors can do is address the source of the problem upstream and invest in cleaning up their data and putting a stop to overpayments in the first place,” he says.

Bikus says overpayments have been a bane for many sponsors since 2011, when the Department of Labor (DOL) made changes to data accessible via the Social Security Administration’s Death Master File (DMF).

“This resulted in plan sponsors being able to identify an average of only 23% of deaths among their participants,” he explains. “Without a singular source of reliable information, companies have been left to aggregate and validate data on their own, using sources such as obituaries with personal identifiable information [PII] and the risk of false positives. The increase in disparate data sources, coupled with the complexity of those supplementary sources, makes finding and verifying deaths more challenging and burdensome than ever.”

Bikus says his firm offers an audit solution called CertiDeath that uses artificial intelligence (AI) to cull through 26,000 databases. This enables PBI’s clients to find 95% of deceased participants. Last year alone, he says, PBI’s service prevented clients from making more than $50 million in overpayments.

Sponsors also make the mistake of overpaying benefits to participants because of systemic errors or the incorrect application of a plan provision, such as the definition of compensation, Gregory says.

Should an overpayment occur, he says, “a plan sponsor has an obligation to recover overpayments on behalf of the retirement plan to protect the plan’s tax-qualified status and comply with the sponsor’s fiduciary responsibilities under ERISA [the Employee Retirement Income Security Act].”

The IRS’ Employee Plans Compliance Resolution System (EPCRS) addresses the issue of overpayment of benefits and outlines four options a sponsor can use to rectify this problem, Gregory says.

The first is to ask the participant to return an overpayment in a lump sum with earnings, he says, though he adds that this might be impractical for many sponsors. The second is for the sponsor to step in and repay the funds, with earnings. If the overpayment was the result of  a vendor’s mistake—the plan’s recordkeeper, for instance—the sponsor could ask the vendor to step in and make the plan whole.

If the participant is slated to receive ongoing future benefits, the sponsor could reduce each of those payments until the overpayment is returned in whole. “Of course, the risk here is that the participant could pass away prior to full recoupment, which obligates the plan sponsor to repay the remaining amount to the plan,” Gregory notes.

Finally, if the mistake was made because the plan wasn’t being run the way the plan documentation specified that it should, in some circumstances, the sponsor could simply amend the plan document retroactively, he says.

He notes that in a recent case, Zirbel v. Ford Motor Co., a participant had been overpaid nearly $250,000 in retirement plan benefits over the course of a decade. Ford asked the participant for the money back, a right specifically provided to it in the plan document.

Instead, the participant appealed to an administrative committee, which denied her appeal but offered her a hardship reduction, which required full disclosure of her finances. She rejected that option and, instead, sued Ford, seeking a declaration that she was entitled to keep the money. The district court granted summary judgment to Ford, and the participant appealed to the U.S. 6th Circuit Court of Appeals, which affirmed the lower court’s decision in Ford’s favor.

In conclusion, Gregory says, “because overpayments are a frequent problem for plan sponsors, it is wise for sponsors to be prepared for them ahead of time. Like Ford, plan sponsors should consider explicitly providing in the plan document that the plan administrator or other fiduciary has the power to collect overpayments. Although this power has been implied by some courts, the best practice is to be explicit. It also is wise, like Ford, to establish a policy and process for reviewing overpayments and permitting participants and beneficiaries to apply for some level of hardship relief, if appropriate.”