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Proposed regulations on the recovery of pension plan overpayments (July 2015)

Date Published: 
Monday, July 20, 2015

The Pension Rights Center submitted comments to the Internal Revenue Service (IRS) on procedures for the recoupment (recovery) of overpayments made to participants. Overpayments occur for several reasons, often due to plan errors in calculating benefit amounts. Retirees are usually unaware that their benefit amounts have been calculated incorrectly and are surprised when they receive a letter from the plan demanding repayment. 

The IRS considers an overpayment of benefits by a plan to be a plan failure that must be corrected. IRS Revenue Procedure 2015-27 asked for comments on procedures for correcting these overpayments.

Background

Plan administrators sometimes make mistakes in calculating benefit amounts. Increasingly, when companies are bought and sold, plan calculations are reviewed and these mistakes are found. Unsuspecting retirees receive letters in the mail advising them that their monthly benefit amounts will be reduced – and that they must repay the plan for the amounts overpaid. Pension plans often choose to recover the overpayment by further reducing the retiree’s monthly pension benefit. This can result in a significant financial hardship. When an overpayment has lasted for years, plans often ask retirees to repay the amount of the overpayment, plus interest, which can be substantial. Even small overpayment amounts can create a hardship for a retiree living on a fixed income. 

When a pension plan overpays a retiree, that plan is considered by the IRS to have failed to meet the requirements of the Internal Revenue Code because a qualified plan has to be operated in accordance with its terms. The IRS Employee Plans Compliance Resolution System lists an option plans can use to correct these overpayment errors and make the plan whole. IRS Revenue Procedure 2013-12 allows the overpayment to be restored to a pension plan by recovering the overpayment with interest from any plan participants who received overpayments. If the amount repaid is insufficient, plans are permitted to threaten to take action against the participant.

Relying on IRS Revenue Procedure 2013-12, many pension plans demanded large repayments from participants and beneficiaries who were living on fixed incomes and who could not afford to make such large repayments. IRS Revenue Procedure 2015-27 modifies the earlier rule to give plans flexibility to recover overpayments from other parties, not just participants.  In addition, the IRS expressed its intent to further revise the guidance for the recovery of overpayments.

The Pension Rights Center’s comments on IRS Revenue Procedure 2015-27 highlight the difficulties faced by retirees who have had their monthly pension benefits reduced due to a plan error and face further reduction of their benefits to repay the overpayments. Retirees are often unaware that they may have been overpaid until they receive a notification from the plan. 

While the repayment burden imposed on retirees must be considered in revising the guidance on overpayments, the Center recognizes that it is in the interests of all plan participants to make the pension plan whole by restoring assets that were paid out incorrectly and that mistakes made years ago often have been absorbed into the plan’s financial calculations.

The Center made the following specific recommendations to the IRS on revising the procedures for correcting overpayments.

  • Overpayment calculations should be limited to a three-year lookback period or the plan’s statute of limitations, whichever is less.
  • Interest should not be collected  on overpayments when participants are not at fault.
  • The amount of benefit reduction for the overpayment should be limited to 10 percent of the new and reduced benefit amount.
  • Monthly pension benefit recoupment reductions should end once  the amount overpaid has been recovered.
  • Plans should be required to seek alternatives before recouping from participants.
  • Demands for lump-sum repayments should be prohibited.
  • Spouses and beneficiaries should not be required to repay any overpayments.

In addition, the Center’s comments include recommendations to the U.S Department of Labor on recoupment issues under their jurisdiction. The Center recommends that the Labor Department require all plans to offer hardship waivers for recoupment actions and to . provide guidance on standards that would apply to hardship waivers.

The Center also recommends that the Labor Department clarify that a recoupment action is a denial of benefits that entitles a participant to all the notice, disclosure and appeals rights afforded to participants by ERISA’s internal claims and appeals rules.

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