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Northwest OH Legal Blog

Monday, September 14, 2020

Defined Benefit Plans & Collecting Overpayments

Richardson vs. IBEW Pacific Coast Pension Fund - District Court bars a pension plan from recovering overpayments made as a result a benefit miscalculation

Anyone that works with defined benefit pensions plans, whether it be as an administrator, fund counsel, trustee, or actuary, knows just how complicated these plans can be. And like any complicated task, mistakes and errors occur in the administration of a defined benefit pension plan.

One of the most common mistakes involves incorrect benefit calculations. If the participant was underpaid, the resolution is simple; increase the benefit to the proper amount and repay the participant the wrongfully withheld amount (plus interest) in one lump sum. However, the situation is much more complicated when the Participant is overpaid. In a recent district court case out of the Ninth Circuit, a defined benefit plan was barred from collecting an overpayment it made to a participant. (Richardson vs. IBEW Pacific Coast Pension Fund 2020 WL 3639625 (W.D., W.A., 2020).

Richardson Case – Facts

The Richardson case involved an overpayment from a defined benefit plan due to a miscalculation by the Plan’s administrator. The plaintiff, Ms. Richardson, was an alternate payee under a QDRO and applied for her benefit in 2006. The QDRO awarded her 100% of her ex-husband’s pension credits earned from November 1974 to March 1996. The Plan approved her application and Ms. Richardson began receiving monthly payments of $2,071.50 in May of 2006.

However, in June of 2017 the Plan informed Ms. Richardson that it had made an error in the calculation of her pension benefits. Under the terms of the Plan, she should have received $1,103.73 per month, meaning she was overpaid $967.77 per month for 11 years! As a result, the Plan reduced her monthly benefit to the proper amount and demanded she repay the overpaid amount (which totaled $130,648.95). Ms. Richardson filed an appeal with the Plan’s trustees, which was denied. She then brought suit in district court asking the court to bar the Plan from collecting the overpayment.

 

Court’s Decision

Ultimately, the Richardson Court allowed the Plan to reduce the Participant’s monthly benefit to the proper amount going forward, but it prevented the Plan from recovering the overpayments. The Richardson Court focused on two important facts to reach this conclusion. First, the Plan’s document limited the ability to recover overpayments to only those that were made:

1. in reliance on willfully made false or fraudulent statements or information submitted by the participant; or 

2. prior to the receipt of any required notifications.

In this case, the mistake was entirely due to the Plan Administrator’s error and was not caused by the participant. Second, the participant indicated that she ceased working at her previous job in reliance on the original benefit calculation.

Moreover, she was now disabled and had no income other than the pension payments and Social Security Disability payments. Therefore, while the Court did allow the Plan to adjust her monthly benefit going forward, it also held that equitable factors prevented the Plan from recovering the overpayment.

 “Here, the balance of the equities does not favor allowing IBEW to recoup its past overpayments to Ms. Richardson. First, the overpayments occurred over a period of more than eleven years. The length of time weighs against permitting any recoupment. Ms. Richardson did not know that she was being overpaid, and she relied on IBEW when it told her that its distributions to her were accurate. This consideration is tired to the first because the amount of the overpayment grew so large entirely due to IBEW’s failure to discover its error for more than 11 years. She does not have the ability to repay such a large such, which IBEW all but admits. Finally, the overpayment occurred due to no fault on Ms. Richardson’s part Rather, the overpayments were solely the result of IBEW’s error.”

Takeaways

The Richardson case was a devastating result for the Plan. However, there are important takeaways for trustees and plan professionals. 

  • Review your plan’s recoupment language and ensure that it allows the plan to recover an overpayment due to an internal mistake or miscalculation. This language is permissible under law and it is unclear why the IBEW Pacific Coast Fund limited its ability to collect overpayment.

  • Consider having an actuary review benefit calculation before they enter pay status. In fact, the Richardson Court considered the failure to conduct an actuarial review a breach of fiduciary duty.

  • Be aware that courts can apply equitable principles to prevent a plan from recovering an overpayment due to an internal error even if the plan document expressly permits recovery. However, keep in mind that before applying this result, most court require extraordinary circumstances, such as proof that the participant detrimentally relied on the incorrect benefit calculation (e.g., Ms. Richardson retiring in reliance on the improper payment).


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