Under SECURE 2.0, plan sponsors were granted discretion to determine whether or not the plan would recoup "inadvertent benefit overpayments." However, SECURE 2.0, did not define the term, leaving implementation of the new provision unclear for plan sponsors. To provide more guidance on the provision, last year, the IRS released Notice 2024-77 providing interim guidance on the provisions regarding inadvertent benefit overpayments under the Employee Plans Compliance Resolution System (“EPCRS”).
An overpayment is an amount that either (1) exceeded the amount payable under plan terms or a limitation in the Internal Revenue Code or regulation or (2) were distributed before payment was permitted under the plan and Internal Revenue Code. The Notice defines an "inadvertent benefit overpayment" as an overpayment that occurs despite the existence of established practices and procedures, is not egregious, does not relate to the diversion or misuse of plan assets, and is not directly or indirectly related to an abusive tax avoidance transaction. However, these rules do not apply to overpayments made to disqualified persons, owner-employees, or payments made under EPCRS to correct a different qualification failure.
Prior to SECURE 2.0, a plan was required take reasonable steps to have overpayments repaid to the plan. Additionally, the plan was required to provide a notice to the participant explaining the overpayment's tax consequences. If the amount of an overpayment was not repaid to the plan following the request, the plan was required to contribute the difference to the plan, unless the overpayment only consisted of a distribution that was not a part of a distributable event but otherwise followed the terms of the plan.
Under the new guidance, a Plan is no longer required to attempt to recoup overpayment amounts or notify the participant of the tax consequences. While the guidance does note that a plan is still permitted to pursue the methods of recoupment provided under EPCRS, a plan is still prohibited from recovering overpayments if:
- Overpayments are sought from any beneficiary;
- Recovery is accompanied by threats of litigation or made through a collection agency or third party;
- Interest or fees are sought with recoupment of overpayments;
- The first overpayment occurred more than 3 years before the participant or beneficiary is first notified in writing of the error; or
- Where the overpayment is going to be recouped by reducing future annuity payments:
- The annual amount recovered cannot exceed 10% of the total amount of the repayment;
- Future payments cannot be reduced below 90% of their original amount; and
- The reduction must cease as soon as the full overpayment has been recovered.
While a plan is no longer required to seek repayment, a plan sponsor still has a fiduciary duty to document and monitor their decision process in addressing improper transactions. If a plan sponsor chooses to forgo seeking recoupment, it will be important to have a process in place to ensure that any documentation on any decisions involving overpayments is properly recorded and filed. A plan sponsor may potentially face situations in which the plan would want or would be required to seek recoupment, and situations in which they would not, but keeping a consistent process for all overpayments is a streamlined way to ensure that there has been proper discussion and documentation in every situation that could be easily provided in an audit.
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