How Can Sponsors Recover Overpayments to 403(b) Plans?

Q: We maintain an ERISA 403(b) plan, in which we have historically recouped any overpayments made to plan participants without any issues. However, we understand that recent guidance has been issued regarding such recoupment. Can we continue to recoup such overpayments? If we can, are there any restrictions on doing so under the latest guidance?

Kimberly Boberg, Kelly Geloneck, Emily Gerard and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: You can still recoup overpayments made to plan participants or beneficiaries. However, there are restrictions on such recoupment for overpayments that qualify as an “inadvertent benefit overpayment.”

The IRS recently released Notice 2024-77, providing interim guidance on the treatment of inadvertent benefit overpayments under the SECURE 2.0 Act of 2022. In the notice, the IRS clarified that recouping overpayments is now optional in most circumstances (before SECURE 2.0, plan sponsors were generally required to take corrective action).

However, the guidance under the notice is limited to Internal Revenue Code implications, meaning the notice did not provide guidance on the changes made to the Employee Retirement Income Security Act’s Section 206(h), which now involves restrictions on the methods used to recoup inadvertent benefit overpayments. These restrictions apply to any ERISA plan (including ERISA 403(b) plans) but not to governmental plans.

Under these new restrictions, when recouping inadvertent benefit overpayments, plan sponsors must not:

• Reduce future payments of non-decreasing annuities by more than 10% of the overpayment each calendar year;
• Seek more than a 10% reduction in future periodic payments under a non-decreasing annuity;
• Seek interest or other collection costs or fees with the overpayment;
• Use a collection agency or include any threat of litigation when seeking to collect the overpayment;
• Collect an overpayment made to a participant from a spouse or other beneficiary; or
• Collect an overpayment if the first overpayment is made more than three years before written notice is provided of the error, except in the case of fraud or misrepresentation by the participant.

Overpayment recipients may contest the recoupment under the plan’s claims procedures, and the responsible plan fiduciary may consider a recipient’s hardship when determining the amount to recover from the recipient.

In the meantime, as we anticipate guidance on ERISA Section 206(h), we advise speaking to your counsel on the methods used to recoup overpayments to ensure you are in compliance.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

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