Mistakes are a fact of life and administering a pension plan is no different. In fact, the average pension plan is full of landmines that can create potential problems, most notably the accuracy of plan data, benefit calculations, and accrual computations.
That is why the IRS created the Employee Plans Compliance Resolution System, or “EPCRS,” to help plan sponsors proactively address and correct any mistakes or errors they encounter. Recently, the IRS made several changes to the EPCRS program through the publication of IRS Revenue Procedure 2021-30. The most important update we received were two new options to address overpayments from defined benefit plans: (1) the Funding Exception Method and (2) the Credit Contribution Method
Funding Exception Method
Under this method, if a multiemployer plan is not in critical, endangered, or critical and declining status, then it does not need to recoup the overpayment or apply future actuarial reductions. Instead, the plan must only adjust future payments to the proper amount as soon as possible. In other words, a multiemployer plan in the “Green Zone” can simply correct the pension payments going forward and move on.
Similarly, a single employer pension plan with a certified or presumed Adjusted Funding Target Attainment Percentage (“AFTAP”) of at least 100% (measured on the correction date) can also use the Funding Exception Method.
Credit Contribution Method
This method is little more complicated but is available to all plans regarding of funding status. Essentially, the overpayment is reduced (but not below zero) by:
- The cumulative increase in the plan’s minimum funding requirements attributable to overpayments; and
- Certain additional contributions above the minimum funding requirements paid to the plan after the first overpayment was made.
If the contribution credit is not enough to cover the full overpayment, then the plan sponsor can contribute the remaining amount or recover it through traditional correction methods (requesting repayment from the participant or adjusting future benefits).
As noted above, certain contributions cannot be counted towards the credit contribution limit. These include any contributions that are designated for other plan purposes, such as withdrawal liability payments and those added to the plan’s prefunding balance.
This guidance is welcome news for any pension plan that discovers it has overpaid a participant or beneficiary. Under previous IRS guidance, plans were forced to repay the overpayment from some other means (e.g., insurance or lump sum) or to recover it from the payee. That was true even if the plan committed the mistake itself. All too often, this recovery method left retirees with the short end of the stick through no fault of their own.
Now, plans have two different options for dealing with overpayment. Both correction methods greatly reduce the hardship these mistakes otherwise place on both administrators and retirees and their beneficiaries.