Multiemployer benefit plans are governed by the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Internal Revenue Code. The SECURE Act 2.0 (“SECURE Act”) became effective on December 29, 2022, as part of the 2023 Consolidated Appropriations Act. The law brings significant changes to the Department of Labor (“DOL”) and Internal Revenue Service (“IRS”) regulations on benefit overpayments, which occur, for example, when retirees, or their beneficiaries, are mistakenly paid more money than they were owed under the terms of the Plan. Under the old rules, fiduciaries were required to recover inadvertent overpayments along with interest in all situations, including those that occurred several years in the past or were not even caused by the Participant. The new rules do two important things; they grant fiduciaries discretion to forgive all, or portion of, an overpayment and limit the plan’s ability to recoup overpaid amounts. Both rules are extremely beneficial to plan participants.
Under these new rules, plan fiduciaries can forgive all or a portion of any overpayment that was “inadvertently” issued. Essentially, that means the participant or beneficiary did not cause the mistake through a misrepresentation. For example, let’s say a plan overpaid a participant by $50 per month over a two-year period (i.e., $1,200 overpayment). If the participant did not cause the mistake, the plan could simply adjust the benefit to the correct amount going forward and move on. There would be no need for the actuary to re-calculate the benefit to include a recoupment factor.
And while plans can still recoup overpayments, the SECURE Act places new restrictions on that right. For example, the recoupment must begin within three (3) years after the overpayment was first made and plans cannot assess interest or fees on the overpaid sum. Additionally, future benefit reductions must cease once the overpayment is recovered. This last point was unclear and many plans continued issuing reduced benefit payments long after the overpayment was recovered. Finally, future benefit payments cannot be reduced below 90% of the amount otherwise payable and the amount recouped each year cannot exceed 10% of the total overpayment.
Important Options to Consider When Benefits are Overpaid:
When overpayments are discovered, there are very important decisions that should be brought before the Plan’s Board of Trustees. Possible options include:
- Follow the Old Rules and Recoup the Overpayment.
The SECURE Act allows Trustees to reduce future benefits to repay the overpayment as they would have done under the old regulations. This option places the burden on the participant but reduces the plan’s potential financial exposure. However, the plan would need to track the recoupments so that they end once the amount is fully repaid.
- Forgive the Overpayment and Reinstate Benefit Amounts Going Forward.
Another option is for the Board of Trustees to forgive the overpayments after the Board has made their decision. Participants or beneficiaries who previously had their benefit amount reduced would have their benefit restored to an amount equal to their normal benefit without the overpayment reduction. This option is beneficial in that it acknowledges the injustice of having a participant or beneficiary repay a debt that they had no knowledge of or fault in doing. Essentially, this option wipes the slate clean for both the participant and the Plan.’
- Forgive Some of the Overpayment and Reinstate Benefit Amounts Going Forward.
Here, the Plan could grant partial relief while also ensuring the overall health of the pension plan. While this approach attempts to balance the two competing interests (i.e., the plan’s financial picture vs. hardship to the participant), it would involve an actuarial adjustment to the benefit that meets the limitations discussed above. Moreover, the plan would also need to track the recoupment to ensure that the cease upon repayment.
The new law makes it clear that fiduciaries must consider the overall health and financial position of the plan before forgoing the collection of overpayments. Ultimately, while the rules give trustees and plan fiduciaries much needed flexibility, they must still satisfy their overarching fiduciary duties to the plan before taking advantage of these rules. That means understanding how and when the overpayment occurred, the current funding status of the plan, and expected returns and contributions coming into the plan going forward.