Pension Overpayments Raise Tough Questions About How to Recoup Losses, Attorneys Say


Pension overpayments result in a host of tough questions when plan fiduciaries attempt to recoup losses, such as the rights of the administrator to a full recovery and the rights of the participants to retain the full monthly payment to which they're entitled, attorneys said in a webinar.

The first step is to adjust the payments to the correct amount, but after that, the situation “gets murky,” said Brian J. Dougherty, a partner in the Philadelphia office of Morgan Lewis & Bockius LLP, during a June 11 webinar on overpayments held by the American Bar Association's Joint Committee on Employee Benefits.

The fiduciary of a plan covered under the Employee Retirement Income Security Act can invoke administrative claims procedure on its behalf, and then adjudicate its own claim, but “that's sort of awkward,” Dougherty said.

Instead, when the fiduciary uses the administrative claims procedure, it should allow the participant who has received an overpayment to file a claim if the person thinks there hasn't been an overpayment or that there is some other reason he or she shouldn't have to restore the overpaid amounts to the plan, Dougherty said.

If the participant accepts the invitation, and later pursues litigation, the administrator may be able to invoke a deferential standard of review in court, and an arbitrary-and-capricious standard of review in any subsequent federal court, Dougherty said.

If the participant doesn't pursue a claim but then files suit, the administrator should have as a defense the failure to exhaust the administrative claims procedures, Dougherty said.

But before even going through that process, plan administrators must comply with the claims procedures under ERISA Section 503, which require plans to notify participants of their appeal rights, said R. Joseph Barton, a partner in the Washington office of Cohen Milstein Sellers & Toll PLLC.

The phrasing of those letters is important, Barton said, noting that he's seen letters that “look like collection demands,” and don't inform participants of their rights. When he sees a plan make that mistake in a claim for benefits, he raises the issue in litigation as an ERISA Section 503 violation, Barton said.

DOL, IRS Guidance

The Department of Labor and the Internal Revenue Service both have recoupment guidance, but Dougherty, Barton and Joyce A. Mader, a partner at O'Donoghue & O'Donoghue LLP in Washington, all agreed that the guidance is inconsistent.

As one point of inconsistency, according to Mader, language in Revenue Procedure 2013-12, which provides guidance on the IRS's Employee Plans Compliance Resolution System, states that if a correction method has been authorized by another agency, the IRS may take into account that agency's action.

In light of the DOL's primary recoupment guidance in Advisory Opinion 77-08 on hardship situations, Mader said that the IRS guidance is unclear. The DOL's guidance provides that fiduciaries may be limited in their duties to recoup overpayments if the “facts and circumstances involved” include hardship to the participant or if the costs to the plan are so high that it would be imprudent to pursue recoupment.

“Whether or not this means that a plan could legitimately take into account hardship I don't know,” Mader said. The EPCRS guidance provides that only minimal total amounts, not per-month amounts, can be ignored, she said.

Another challenge with the EPCRS guidance is that it states that the correction method must be one that doesn't have an adverse effect on either the participant, beneficiary or plan, Mader said. “Absent paying it all back, I'm kind of at a loss to think of what it would be that wouldn't have an adverse effect on the participants, beneficiaries or plan,” she said.

Because the agencies' guidance documents don't say who is responsible for correcting the plan's funding, if the error was caused by a third-party administrator, Mader said she would sue the TPA to make the plan whole.

“That's an appropriate response,” Barton said.

Excerpted from a story that ran in Pension & Benefits Daily (06/16/2015).

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