To Err Is Human; To Correct Is Provided for in SECURE Act 2.0, Passed by Congress

New Rules Regarding Plan Overpayments

Recovering overpayment no longer mandatory

Prior Internal Revenue Service (IRS) guidance mandated that plan fiduciaries make attempts to recover accidental benefit overpayments made to plan participants and beneficiaries. SECURE 2.0 provides that plan fiduciaries are no longer required to recover retirement benefit overpayments from participants. The decision not to seek recoupment must still be made by the fiduciary “in the exercise of its fiduciary discretion,” but the plan will not fail to comply with the Employee Retirement Income Security Act of 1974 (ERISA) or risk losing tax-qualified status merely because of the decision not to recoup overpayments. The law specifically notes that minimum funding obligations are unchanged.

Recovery of overpayments is subject to new rules

If fiduciaries seek to recover overpayments, they are now subject to the following rules:

• No more than 10% of an overpayment may be recouped from a participant’s nondecreasing annuity payments in any calendar year, and the participant’s benefit payments may not be reduced below 90% as a result of recoupment of an overpayment. Recoupment of overpayments from payments other than nondecreasing annuity payments are subject to rules developed by the Department of Labor.
• No interest or fees may be sought from the participant.
• Litigation may not be threatened, unless there is a reasonable likelihood that the plan can recover more than the cost of recovery.
• No third-party collectors or collection agencies may be used (unless allowed by court judgment or settlement).
• Overpayments to participants may not be recouped from their beneficiaries.
• The plan must notify the participant in writing within three years of the first overpayment, otherwise no recoupment will be allowed (except in the case of the participant’s fraud or misrepresentation).

Additionally, even if the participant is culpable:

• The participant or beneficiary may contest the recoupment under the plan’s claims procedures.
• The plan may consider hardship to the participant or beneficiary.

Special rules for decisions made before enactment

Repayments, or reductions in benefit payments, that had already started before enactment may continue in effect.

Expanding EPCRS

SECURE 2.0 expands EPCRS, to allow for self-correction in more situations. Except as otherwise provided in the Internal Revenue Code (Code) or in other applicable guidance, self-correction is now allowed for any failures to comply with Code Sections 401(a), 403(a), 403(b), 408(p), and 408(k) as well as for any failure relating to a loan by the plan to a participant. SECURE 2.0 requires that self-corrections be completed within a reasonable period after the applicable failure is identified.

This builds on the existing EPCRS as described in Revenue Procedure 2021–30. As with the current EPCRS, to be eligible for this new self-correction,

• the plan must have established practices and procedures reasonably designed to promote and facilitate overall compliance
• the failure must not be “egregious”
• the failure must not relate to the diversion or misuse of plan assets
• the failure must not relate to an abusive tax avoidance transaction

In addition, unlike current EPCRS rules, which limit certain self-corrections during the time a plan is under examination, self-correction is permitted during such time if the plan sponsor undertakes actions that demonstrate a specific commitment to implement a self-correction.

The provision requires regulatory guidance within two years of enactment and requires that the corrections be made within “the general principles” of existing law. The new provision also clarifies that the correction period is indefinite.

Knowledge Management Lawyer Katie Dean contributed to this Sidley Update.