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Continue Allowing Employers to Fix Errors Causing Overpayments, ASPPA Says

On Nov. 3, 2015, ASPPA submitted a comment letter in response to an IRS request in Revenue Procedure 2015-27 for recommendations regarding the treatment of overpayments, as defined in sections 5.01(3)(c) and 5.02(4) of Revenue Procedure 2013-12, under the Employee Plans Compliance Resolution System (EPCRS).

ASPPA’s comment letter recommended that the IRS continue to provide employers with flexibility to correct errors that result in overpayments. ASPPA specifically recommended that the IRS should do the following:

Always permit (but not require) employers to request recoupment of overpayments from participants.

Amend EPCRS to provide that, as a condition of the relief afforded by EPCRS:

  • an employer cannot take legal action against a participant for recoupment in excess of the overpayment amount (plus earnings) minus any direct expenses the participant incurs as the result of the overpayment;
  • the request for return of the overpayment must notify the participant of his or her right to reduce the amount repaid for such direct expenses; and
  • the request for return of an overpayment must include an informational notice regarding avoidance of excise taxes and income taxes on the overpayment, and the IRS should provide model language for such notice.
Amend EPCRS to clarify the following:

  • Employers are permitted to correct overpayments using an approach similar to that used for the PBGC, but modified to permit the recoupment of earnings on overpayments and permit reductions over the limits described in 29 C.F.R. §4022.82(a)(2).
  • An employer that uses such an approach is not required to contribute an amount to make the plan whole for the overpayments.
  • An employer may request recoupment of an overpayment without interest.
  • Any reasonable rate may be used to calculate interest on overpayments for purposes of determining the amount required to make the plan whole for such overpayments, but that the average earnings on plan assets for the period will be deemed reasonable.
  • Extend the existing rules so that:
1. overpayments may be corrected by reduction of future benefits in both defined benefit and defined contribution plans, provided that in situations where the participant was not given an opportunity to elect the distribution (such as an automatic cashout), the participant should first be given an opportunity to repay the distribution, with earnings;

2. if the original payment was an eligible rollover distribution (but for the overpayment), then the overpayment may continue to be treated as an eligible rollover distribution to the extent the future benefit is reduced to recover the overpayment; and

3. to the extent the participant’s remaining benefit is reduced to recover the overpayment, no amount is necessary to make the plan whole.

  • If an employer does request recoupment of an overpayment from a participant, any reasonable rate may be used to calculate interest on such overpayment, but the following rates will be deemed reasonable:
1. the 417(e) first segment rate; or

2. the rate that was used for the benefit calculation, such as the 5.5% interest rate that typically limits lump sums when the 415 limit applies.

  • If overpayments are corrected by retroactive amendment, then no contribution is necessary to make the plan whole.
  • If an overpayment in a defined contribution plan occurred and the amount would not have been allocated to other participants, then no additional amount is necessary to make the plan whole.
In addition, ASPPA recommended that the IRS expand EPCRS to permit an employer to correct overpayments through the Self Correction Program (SCP) by adopting a retroactive amendment if the overpayments are eligible for self-correction under EPCRS and the plan could have been amended to provide the benefits actually paid without violating any requirement under the federal income tax code (such as Code Sections 401(a)(4) and 415).

ASPPA also suggested that to provide employers with the requisite certainty needed to utilize SCP, the IRS should clarify what rates will be deemed reasonable in calculating the amount needed to ensure that the plan is made whole.