Unions Object to Recouping Overpayment of Pensions From Members
The pension plan administrator for the city of San Jose employees has known about the overpayments due to miscalculations since 2011, but the overpayments continue.
IFPTE Local 21, a union representing 11,000 scientists, engineers, and other public-sector professionals in the Bay Area of California, has partnered with AFSCME Local 101 to protest the possibility that retirees will be asked to make up about 1.5 million dollars in overpayments due to a payment miscalculation.
While Retirement Services discovered the payment miscalculation in 2011, it did not stop overpayments to retirees, nor was notice given to any affected retirees that they may have received overpayments based on this error. Notice was finally made to retirees in April 2018, yet overpayments continue.
The San Jose Retirement Board is considering its options, but one is to require full repayment of overpayments including interest per year by each retired employee or surviving beneficiary.
IFPTE Local 21 member and Community Services Supervisor Olympia Williams said in a statement, “While mistakes happen when managing a large complex payment system, we expect a higher level of responsibility from the Director of our Retirement System. At no time should overpayments, that are now affecting widowers living on a partial fixed income, be hidden from potentially affected retirees, like what happened in this case. When the error was discovered, and you knew the cause of that error, it should have been possible to identify anyone who potentially could have been affected. This is the responsible and transparent thing to do.
We will ask, as City of San Jose current employees, and future retirees, that the pension board mitigate the impact to those who were overpaid because of the 7-plus years of lack of notification.”
IRS Approves Plan Sponsor’s Student Loan Repayment Benefit in 401(k) Plan
Because participants receiving a student loan repayment non-elective contribution can still make deferrals to the 401(k) plan and receipt of the contribution is not dependent on whether the employee makes deferrals to the plan, the IRS ruled the benefit will not violate the “contingent benefit” prohibition of the Income Tax Regulations.
A 401(k) plan sponsor requested and Internal Revenue Service (IRS) ruling that its proposal to amend the plan to provide student loan repayment (SLR) non-elective contributions under the program will not violate the “contingent benefit” prohibition of section 401(k)(4)(A) and section 1.401(k)-1(e)(6) of the Income Tax Regulations.
In a Private Letter Ruling, the IRS explains that under the 401(k) plan, if an eligible employee makes an elective contribution during a payroll period equal to at least 2% of his or her eligible compensation during the pay period, the plan sponsor makes a matching contribution on behalf of the employee equal to 5% of the employee’s eligible compensation during the pay period. The regular matching contributions are made each payroll period.
The plan sponsor proposes to amend the plan to offer a student loan benefit program, under which it would make an employer non-elective contribution on behalf of an employee conditioned on that employee making student loan repayments (SLR non-elective contribution). The program is voluntary—an employee must elect to enroll, and once enrolled, may opt out of enrollment on a prospective basis. If an employee participates in the program, the employee would still be eligible to make elective contributions to the plan but would not be eligible to receive regular matching contributions with respect to those elective contributions.
Such an employee would be eligible to receive SLR non-elective contributions and true-up matching contributions, as appropriate. All employees eligible to participate in the plan will be eligible to participate in the student loan repayment program. If an employee initially enrolls in the program but later opts out of enrollment, then the employee will resume eligibility for regular matching contributions.
Under the program, if an employee makes a student loan repayment during a pay period equal to at least 2% of the employee’s eligible compensation for the pay period, then the plan sponsor will make an SLR non-elective contribution as soon as practicable after the end of the year equal to 5% of the employee’s eligible compensation for that pay period. The SLR non-elective contribution is made without regard to whether the employee makes any elective contribution throughout the year. If the employee does not make a student loan repayment for a pay period equal to at least 2% of the employee’s eligible compensation, but does make an elective contribution during that pay period equal to at least 2% of the employee’s eligible compensation for that pay period, then the plan sponsor will make a matching contribution as soon as practicable after the end of the plan year equal to 5% of the employee’s eligible compensation for that pay period (true-up matching contribution).
In order to receive either the SLR non-elective contribution or the true-up matching contribution, the employee would need to be employed with the plan sponsor on the last day of the plan year (except in the case of termination of employment due to death or disability).
Both SLR non-elective contributions and true-up matching contributions will be subject to the same vesting schedule as regular matching contributions. The SLR non-elective contribution will be subject to all applicable plan qualification requirements, including, but not limited to, eligibility, vesting, and distribution rules, contribution limits, and coverage and nondiscrimination testing. The SLR non-elective contribution will not be treated as a matching contribution for purposes of any testing under or requirement of section 401(m). The true-up matching contribution will be included as a matching contribution for purposes of any testing under or requirement of section 401(m).
The plan sponsor said it has not extended and has no intention to extend any students loans to employees that will be eligible for the program.
What the IRS says
In this case, the IRS notes that SLR non-elective contributions under the program are conditioned on whether an employee makes a student loan repayment during a pay period and are not conditioned (directly or indirectly) on the employee making elective contributions under a cash or deferred arrangement.
In addition, because an employee who makes student loan repayments and thereby receives SLR non-elective contributions is still permitted to make elective contributions, the SLR non-elective contribution is not conditioned (directly or indirectly) on the employee electing to have the employer make or not make contributions under the arrangement in lieu of receiving cash. Therefore, the IRS concludes that the proposal to amend the plan to provide SLR non-elective contributions under the program will not violate the “contingent benefit” prohibition of section 401(k)(4)(A) and section 1.401(k)-1(e)(6).
The agency says its ruling is based on the assumption that the plan sponsor will not extend any student loans to employees that will be eligible for the program.
IRS Private Letter Rulings are directed only to the taxpayer requesting it. However, they can give plan sponsors an idea of what the IRS thinks about plan sponsor decisions or programs.