We processed a distribution of a participant's account in full (mistakenly thinking we had a distributable event). Now we need to correct the error. Is an impermissible distribution of a participant's full account considered an overpayment in EPCRS? I am trying to figure out how to correct the error and the overpayment correction is the only area I can find that seems to apply to our situation.
Thanks.
Full Version: Impermissible Distribution
Also, as a follow-up question: what do we do if the participant is unable or unwilling to return the money that was distributed to them?
QUOTE (waid10 @ Mar 16 2010, 06:20 PM) 
We processed a distribution of a participant's account in full (mistakenly thinking we had a distributable event). Now we need to correct the error. Is an impermissible distribution of a participant's full account considered an overpayment in EPCRS? I am trying to figure out how to correct the error and the overpayment correction is the only area I can find that seems to apply to our situation.
Thanks.
Thanks.
Did you ever find an answer to this?
A payment in excess of what the participant or beneficiary is entitled to receive is an overpayment under EPCRS. Rev. Proc. 2008-50 has correction methods for overpayments. Of course, you will have to determine which program you are under; SCP, VCP, etc. The easiest way to find information is to search the Rev-Proc for "overpayment".
QUOTE
Rev. Proc. 2008-50, Section 5.01(3)(c) Overpayment. The term “Overpayment” means a Qualification Failure due to a payment being made to a participant or beneficiary that exceeds the amount payable to the participant or beneficiary under the terms of the plan or that exceeds a limitation provided in the Code or regulations. Overpayments include both payments from a defined benefit plan and payments from a defined contribution plan (either not made from the participant's or beneficiary's account under the plan or not permitted to be paid either under the terms of the plan or under the Code or regulations). However, an Overpayment does not include a payment that is made pursuant to a correction method provided under this revenue procedure for a different Qualification Failure. Overpayments must be corrected in accordance with section 6.06(3).
QUOTE
Rev. Proc. 2008-50, Section 6.06(3) Correction of Overpayment failures. An Overpayment from a defined benefit plan is corrected in accordance with the rules in section 2.04(1) of Appendix B. An Overpayment from a defined contribution plan is corrected in accordance with the Return of Overpayment method set forth in this paragraph. Under this method, the employer takes reasonable steps to have the Overpayment, plus appropriate interest from the date of the distribution to the date of the repayment, returned by the participant or beneficiary to the plan. To the extent the amount returned to a defined contribution plan is less than the Overpayment adjusted for earnings at the plan's earnings rate, then the employer or another person must contribute the difference to the plan. The Overpayment, adjusted for earnings at the plan's earnings rate to the date of the repayment, is to be placed in an unallocated account, as described in section 6.06(2), to be used to reduce employer contributions (other than elective deferrals) in the current year and succeeding year(s) (or if the amount would have been allocated to other eligible employees who were in the plan for the year of the failure if the failure had not occurred, then that amount is reallocated to the other eligible employees in accordance with the plan's allocation formula). In addition, the employer must notify the employee that the Overpayment was not eligible for favorable tax treatment accorded to distributions from Qualified Plans (and, specifically, was not eligible for tax-free rollover).
What I'd really like to know is whether an impermissible distribution (e.g., a distribution when the participant is not entitled to one) is an "Overpayment". As you noted, an Overpayment is generally defined as payment in excess of the amount payable. If a participant isn't entitled to a distribution, would any payment be in excess of the amount payable (which technically is zero) and thus be an Overpayment or does an Overpayment occur only when they receive more than they should have?
The method of correcting an Overpayment under EPCRS would require the employer to reimburse the plan when collection efforts fail. This seems like an unreasonable correction method when a participant receives their entire account balance (and not a penny more), but just received it prematurely.
The method of correcting an Overpayment under EPCRS would require the employer to reimburse the plan when collection efforts fail. This seems like an unreasonable correction method when a participant receives their entire account balance (and not a penny more), but just received it prematurely.
Make your point under VCP.
I don't see how an impermissible distribution could be anything other than an overpayment. The payment was $X. The participant was entitled to receive a distribution of $0 under the terms of the plan. That makes the entire $X payment an overpayment.
If the participant doesn't repay the distribution the correction still may not be a big deal. That is, unless the employer doesn't want to contribute to the plan. The corrective deposit is used for employer contributions. We had this happen last year. A client had an employee who became legal and got a valid social security number. Without telling us what they were doing, they terminated him on their payroll under the old SSN and rehired him under the new SSN. He received a distribution while still employed before we found out what they were doing. Of course, the participant did not repay the distribution. As stated in the second quote in my prior post, the corrective deposit was held in an unallocated account and used towards their profit sharing contribution. They contributed the same amount they intended to contribute, they just designated part of it as the corrective deposit. Note, the participant's account did not get restored. All in all, the correction was fairly painless.
If the participant doesn't repay the distribution the correction still may not be a big deal. That is, unless the employer doesn't want to contribute to the plan. The corrective deposit is used for employer contributions. We had this happen last year. A client had an employee who became legal and got a valid social security number. Without telling us what they were doing, they terminated him on their payroll under the old SSN and rehired him under the new SSN. He received a distribution while still employed before we found out what they were doing. Of course, the participant did not repay the distribution. As stated in the second quote in my prior post, the corrective deposit was held in an unallocated account and used towards their profit sharing contribution. They contributed the same amount they intended to contribute, they just designated part of it as the corrective deposit. Note, the participant's account did not get restored. All in all, the correction was fairly painless.
When you go in under VCP, you might think about citing DOL Advisory Opinion 77-32A. I've included an excerpt below - see that last paragraph of the excerpt, particularly the sentence I've underlined. While this was probably considered more in a DB context, it seems applicable for a DC if all "reasonable" attempts for repayment have been unsuccessful.
..."For discussion purposes, we are dividing the first ruling requested into three questions:
A. If a participant or beneficiary fails to repay an erroneous payment he received from the Fund, may the unpaid amount due from him as reimbursement be offset against any plan benefits due to or for the participant or beneficiary until the Fund is repaid in full?
B. If a participant or beneficiary fails to repay an erroneous payment he received from the Fund, may his eligibility for plan benefits be terminated until the amount due is repaid in full?
C. If a participant or beneficiary fails to furnish information requested by the Fund which is pertinent to the Fund’s operations, may the Fund delay payment of any benefits or may the participant’s or beneficiary’s eligibility for plan benefits be terminated until the information is supplied?
With respect to question A, we note that in accordance with section 404(a)(1)(B) of ERISA, a fiduciary must attempt, with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, to collect money owed to the plan, including recovery of erroneous payments made from a plan. We believe that, depending on the facts and circumstances relating to each erroneous payment, reducing future benefits payable by a fund to a participant or beneficiary, in accordance with the provisions of the plan, may be prudent if other reasonable attempts to collect the erroneous amount have failed. In this regard, payment of the erroneous amount to the participant or beneficiary may be viewed at an advance payment of benefits due him under the plan.
"...
..."For discussion purposes, we are dividing the first ruling requested into three questions:
A. If a participant or beneficiary fails to repay an erroneous payment he received from the Fund, may the unpaid amount due from him as reimbursement be offset against any plan benefits due to or for the participant or beneficiary until the Fund is repaid in full?
B. If a participant or beneficiary fails to repay an erroneous payment he received from the Fund, may his eligibility for plan benefits be terminated until the amount due is repaid in full?
C. If a participant or beneficiary fails to furnish information requested by the Fund which is pertinent to the Fund’s operations, may the Fund delay payment of any benefits or may the participant’s or beneficiary’s eligibility for plan benefits be terminated until the information is supplied?
With respect to question A, we note that in accordance with section 404(a)(1)(B) of ERISA, a fiduciary must attempt, with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, to collect money owed to the plan, including recovery of erroneous payments made from a plan. We believe that, depending on the facts and circumstances relating to each erroneous payment, reducing future benefits payable by a fund to a participant or beneficiary, in accordance with the provisions of the plan, may be prudent if other reasonable attempts to collect the erroneous amount have failed. In this regard, payment of the erroneous amount to the participant or beneficiary may be viewed at an advance payment of benefits due him under the plan.
"...
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