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

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By Sean Forbes

June 15 — 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.

Rev. Proc. 2015-27

The IRS modified its EPCRS guidance with Rev. Proc. 2015-27 to provide plan fiduciaries and administrators with flexibility in determining from whom to recover losses due to overpayments, said Avaneesh K. Bhagat, an IRS attorney based in El Monte, Calif., and program coordinator for EPCRS.

The facts-and-circumstances test under Rev. Proc. 2015-27 doesn't provide “hard-and-fast” rules, which means that plans have room to fashion a correction for overpayments, or any other issue, Bhagat said.

Regarding overpayments, “I would urge you to look at the impact of an overpayment both with respect to the participants who received it, but also to the remaining participants who will be in pay status going forward,” Bhagat said. Depending on the particular situation, the plan could be amended to provide a greater benefit to those participants who received an overpayment, particularly when the plan doesn't have any funding restrictions or the amendment wouldn't result in a nondiscrimination issue, Bhagat said.

The facts-and-circumstances test means that fiduciaries may have other options, Bhagat said. “It's not always black and white,” he said. “We have to get out of that binary situation, where it's an either/or scenario, when there could be multiple options.”

Case Law Guidance

Where the IRS and the DOL leave room for plan fiduciaries who want more guidance, the courts have stepped in, the attorneys said.

For example, according to Barton, the U.S. Court of Appeals for the Sixth Circuit, in Wells v. United States Steel & Carnegie Pension Fund Inc., 950 F.2d 1244, 1251 (6th Cir. 1991), developed a set of useful factors to determine whether a repayment would be inequitable, depending on:

• the participant's or beneficiary's disposition of the money that was overpaid,

• the amount of the overpayment,

• the nature of the mistake made by the administrator,

• the amount of time that has passed since the mistake was made,

• the participant's total income and the effect of the recoupment on the participant.


“I think those are really appropriate factors for courts to take into consideration,” Barton said. “It's not just equitable relief, it's appropriate equitable relief.”

Plan Drafting

In the wake of a pair of U.S. Supreme Court rulings, “the judicial system should be prepared to enforce plans as written, including remedial provisions” that fiduciaries may make against participants, Dougherty said.

In Heimeshoff v. Hartford Life & Accident Ins. Co., 57 EBC 1265 (U.S. 2013) , the Supreme Court held that a long-term disability plan's three-year limitations period was enforceable and didn't offend ERISA's two-tiered remedial scheme.

In U.S. Airways, Inc. v. McCutchen, 133 S.Ct. 1537, 55 EBC 1845 (U.S. 2013), the high court held that equitable defenses can't override clear plan terms in a plan's action for reimbursement under ERISA Section 502(a)(3), but application of the common-fund doctrine is appropriate when the plan is silent as to the allocation of attorneys' fees.

A plan sponsor can draft the plan with a no-fault provision, so that a fault on the part of either the participant or the administrator is neither a condition to recover overpayments nor a defense for the participant, Dougherty said.

Furthermore, if the provision is in the plan, it can be considered as part of an administrative claim, Dougherty said. If the administrator were to wind up in court, it could claim a deferential standard of review on an action taken in accordance with the plan terms, he said.

But that would be only within limits, especially with respect to benefits earned prior to the time the plan was amended to include such a provision, Barton said.

To contact the reporter on this story: Sean Forbes in Washington at

To contact the editor responsible for this story: Phil Kushin at

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