Employee Benefits
IRS Provides Guidance on Benefit Overpayment Rules, Reconciles SECURE 2.0 with EPCRS
Nov 07, 2024
On October 15, 2024, the IRS released Notice 2024-77, providing guidance on the correction of inadvertent benefit overpayments under the SECURE 2.0 Act of 2022 (“SECURE 2.0”).
As background, effective December 29, 2022, SECURE 2.0 significantly changed the rules regarding the recoupment of “inadvertent benefit overpayments” from retirement plans by providing certain fiduciary and tax-qualification relief when plans decide not to seek recoupment of an overpayment and imposing certain conditions on plan fiduciaries when plans decide to seek recoupment of an overpayment. The changes raised questions as to whether and how plans should seek to recoup overpayments, particularly in light of prior conflicting rules under the IRS’s Employee Plans Compliance Resolution System (“EPCRS”).
Notice 2024-77 clarifies how the SECURE 2.0 rules apply and interact with EPCRS. Some notable clarifications are discussed below.
- Defining “Inadvertent Benefit Overpayment”: Notice 2024-77 defines “inadvertent benefit overpayment” as an “eligible inadvertent failure” (as defined under separate SECURE 2.0 rules that expand the self-correction process under EPCRS) that occurs due to a payment exceeding the amount payable under the plan or the Code, including payments made before a distribution is permitted. Notice 2024-77 also clarifies that an “inadvertent benefit overpayment” does not include payments made to certain disqualified persons or owner-employees, or payments made pursuant to an EPCRS correction for a different qualification failure.
- Reconciling SECURE 2.0 with EPCRS: Notice 2024-77 clarifies how SECURE 2.0 impacts the overpayment rules under EPCRS, in part clarifying that certain provisions of EPCRS, including provisions that require corrective payments, no longer apply with respect to an inadvertent benefit overpayment. Notice 2024-77 also clarifies that plans may seek recoupment from overpayment recipients under EPCRS, but are not required to do so. However, Notice 2024-77 notably does not address the SECURE 2.0 changes under ERISA Section 206(h), which impose conditions on fiduciaries who seek recoupment of inadvertent benefit overpayments. For example, ERISA Section 206(h) in part generally prohibits fiduciaries from: (1) seeking recoupment of an inadvertent benefit overpayment that commenced more than 3 years before the participant or beneficiary is notified in writing of the error; (2) seeking interest or other amounts on an inadvertent benefit overpayment; or (3) seeking recoupment from a beneficiary (e.g., a spouse, surviving spouse, former spouse, or other beneficiary) for an inadvertent benefit overpayment to a participant. Accordingly, although Notice 2024-77 provides that plans may seek recoupment under EPCRS, plan sponsors should separately consider whether ERISA’s fiduciary rules permit recoupment based on the facts presented.
- Clarifying Treatment for Rollovers: Notice 2024-77 explains how the SECURE 2.0 relief applies when inadvertent benefit overpayments are rolled over to another plan, providing:
- If a plan does not seek recoupment for an inadvertent benefit overpayment, that overpayment (or the portion for which recoupment is not sought) is treated as a tax-favored, eligible rollover distribution if the payment would have been an eligible rollover distribution but for being an overpayment.
- If a plan seeks recoupment of an inadvertent benefit overpayment that a recipient has rolled over into a second plan: (1) regardless of plan terms, the amount recouped to the original plan is treated as an eligible rollover distribution for purposes of transferring the amount between the two plans; but (2) the amount that is not recouped to the original plan is not treated as an eligible rollover distribution. With respect to the latter scenario, Notice 2024-77 reiterates that EPCRS requires the plan sponsor to notify the recipient that any unreturned portion is not eligible for favorable tax treatment, including tax-free rollover, and clarifies that any such notice may be combined with a plan sponsor’s recoupment request.
- Clarifying Treatment for Overpayments Resulting from Failures under Sections 401(a)(17) and 415: Notice 2024-77 explains how the SECURE 2.0 relief applies with respect to inadvertent benefit overpayments that involve violations of the limits under Code Sections 401(a)(17) and 415 (i.e., the annual contribution limits). Notice 2024-77 also clarifies that plan sponsors may not correct an inadvertent benefit overpayment by amending the plan to increase past benefit payments to affected parties if the amendment results in a violation of the limits under Code Sections 401(a)(17) or 415 for a past year.
In light of Notice 2024-77, plan sponsors should consider the following:
- Consider Recoupment Process: How should the plan approach correcting benefit overpayments moving forward? For example, when dealing with an overpayment issue, a threshold question is whether the overpayment constitutes an “inadvertent benefit overpayment” covered by the new SECURE 2.0 rules.
- Consider Plan Amendments: Does the plan document include any provisions regarding the recoupment of overpayments? If so, is it necessary to amend those provisions to reflect the SECURE 2.0 changes, as explained by Notice 2024-77? The deadline for plans to adopt SECURE 2.0 amendments has generally been delayed until December 31, 2026.
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