PENSION OVERPAYMENTS AND UNDERPAYMENTS. R. Joseph Barton Avaneesh K. Bhagat Denise M. Clark Brian J. Dougherty Joyce A. Mader

Transcription

1 PENSION OVERPAYMENTS AND UNDERPAYMENTS R. Joseph Barton Avaneesh K. Bhagat Denise M. Clark Brian J. Dougherty Joyce A. Mader

2 PENSION UNDERPAYMENTS Tax qualification requirements and fiduciary responsibility both require that participants be made whole. Rev. Proc (EPCRS), Secs. 5.02(2)(b) and 6.02(1): any failure to follow plan provisions is an operational failure, and participants and beneficiaries must be restored to benefits and rights they would have had if failure had not occurred. Presentation will focus on recovery of pension overpayments. 2

3 PENSION OVERPAYMENTS Ongoing payments, e.g., annuities. Reduction to future payments. Any limits to amount of reduction? Cessation of payments pending full recovery? Do (should) 25% limit on recovery under benefit suspension rules apply? 26 CFR (b)(3) Administrative claims procedure. No ongoing payments. DC plan, DB lump sum, deceased participant, inadequate life expectancy. Recovery methods. Request for repayment. Administrative claims procedure? If so, as a fiduciary recovery procedure or participant defense? Futility? Legal action. Cost/benefit analysis. 3

4 REGULATORY AND JUDICIAL FRAMEWORK IRS EPCRS Overpaid and underpaid pensions are operational defects to be corrected under EPCRS Rev. Proc (Citations in this portion are to Rev. Proc.) Treated as Qualification Failure. See 5.01(2) and 5.01(3)(c). Generally a Qualification Failure is not corrected unless full correction is made with respect to all participants and beneficiaries and for all taxable years

5 REGULATORY AND JUDICIAL FRAMEWORK (cont.) IRS EPCRS EPCRS Correction Principles Restore plan/participants to position had failure not occurred. 6.02(1) Correction should be reasonable/appropriate for failure & should if possible resemble correction already provided in guidance. Any method in Appendix A&B of Rev. Proc. Deemed reasonable. 6.02(2) Correction may not violate another specific qualification requirement of Code 401(a). 6.02(2)(d) 5

6 REGULATORY AND JUDICIAL FRAMEWORK (cont.) IRS EPCRS EPCRS Correction Principles (continued) If correction method has been authorized by other agency with respect to legal requirements within that agency s authority & correction relates to failure covered by Rev. Proc. Service may take other agency s action into account. 6.02(2)(e) Special Exceptions to Full Correction. 6.02(5) Burden, estimates, delivery of small benefits, recovery of small overpayments, lost participants. 6

7 REGULATORY AND JUDICIAL FRAMEWORK (cont.) IRS EPCRS EPCRS Correction Principles (continued) Defined Benefit Plan Overpayments Return of Overpayment: Plan sponsor must take reasonable steps to have overpayment with interest at the plan s earnings rate returned to plan and must reduce future payments to reflect corrected amount. Appendix B, 2.04(1)(a)(i). To the extent the amount returned is less than the above the plan sponsor must contribute the difference to the plan. 7

8 REGULATORY AND JUDICIAL FRAMEWORK (cont.) IRS EPCRS EPCRS Correction Principles (continued) Defined Benefit Plan Overpayments (See also Rev. Proc , Slide 10) Adjustment of Future Payments: Future payments are reduced to reflect corrected amount plus additional to collect overpayment plus interest at the rate used to determine actuarial equivalence. Only applies if payment is being distributed in periodic payments. Recoupment may not be applied to survivor benefits. Appendix B, 2.04(1)(a)(ii)(A). 8

9 REGULATORY AND JUDICIAL FRAMEWORK (cont.) IRS EPCRS EPCRS Correction Principles (continued) Defined Contribution Plan Overpayments (See Rev. Proc , Slide 11) Return of Overpayment: Plan sponsor must take reasonable steps to have overpayment with interest at plan s earnings rate returned to plan and must reduce future payments to reflect corrected amount. 6.06(4)(a). To the extent the amount returned is less than the above the plan sponsor must contribute the difference to the plan unless the overpayment was an impermissible in-service distribution but was otherwise computed in accordance with the plan. 6.06(4)(b). 9

10 REGULATORY AND JUDICIAL FRAMEWORK (cont.) IRS EPCRS Rev. Proc Defined Benefit Plan. Overpayment may be corrected in accordance with 2.04(1) of Appendix B or any other appropriate correction method. 6.06(3) Examples-- Using rules similar to 2.04(1) of Appendix B but have employer or other person contribute the amount of the overpayment with appropriate interest in lieu of seeking recoupment. Adopting retroactive plan amendment to conform plan document to operations. Any other correction method used must satisfy correction principles of 6.02 and other applicable rules in Rev Proc

11 REGULATORY AND JUDICIAL FRAMEWORK (cont.) IRS EPCRS Rev. Proc Defined Contribution Plan. New 6.06(4)(f) provides that overpayment may be corrected -- Using rules similar to 6.06(4)(a) but have employer or other person contribute the amount of the overpayment with appropriate interest in lieu of seeking recoupment. Adopting retroactive plan amendment to conform plan document to operations. Any other correction method used must satisfy correction principles of 6.02 and other applicable rules in Rev Proc

12 REGULATORY AND JUDICIAL FRAMEWORK (cont.) IRS EPCRS EPCRS Correction Principles (continued) Underpayments Corrective distributions from a defined benefit plan are to be increased to take into account the delayed payment in accordance with plan provisions on actuarial equivalence in effect when distribution should have been made. 6.02(4)(d) Corrective allocations to defined contribution plan based on terms of plan and other applicable information at time allocation should have been made adjusted for earnings/forfeitures that would have been allocated had failure not occurred. 6.02(4)(a) 12

13 REGULATORY AND JUDICIAL FRAMEWORK (cont.) DOL Guidance Fiduciary duty to collect overpayments. Reduction or cessation of future payments may be appropriate, depending on circumstances. Competing/conflicting duty to consider: Hardship to participant. Cost of recovery. Adv. Op ; also Adv. Ops , 77-32A, 77-33,

14 REGULATORY AND JUDICIAL FRAMEWORK (cont.) Court Decisions The Court decisions tend to fall into the following categories: Implicit Right to Recoupment Contractual Right to Recoupment clear and unambiguous plan language Equitable Right to Recoupment plan language not so clear, breach of fiduciary duty 14

15 REGULATORY AND JUDICIAL FRAMEWORK (cont.) Tucker v. GM Retirement Program, 949 F. Supp. 47 (D. Mass. 1996), Recoupment of overpaid benefits does not violate ERISA s non-forfeitability requirement under

16 REGULATORY AND JUDICIAL FRAMEWORK (cont.) Northcutt v. GM Hourly-Rate Employees Pension Plan, 467 F.3d 1031 (7th Cir. 2006) Nothing in ERISA s enforcement framework prevents a plan from enforcing a contractual reimbursement arrangement. 16

17 REGULATORY AND JUDICIAL FRAMEWORK (cont.) Litigation Approaches Claims under 502(a)(1)(B) treating the recoupment like a benefit denial; subject to the arbitrary and capricious standard of review. Claims under 502(a)(3) treating the recoupment like an trustee decision by plan administrator or plan fiduciaries; subject to prudent person standard. 17

18 Johnson v. Retirement Program Plan for Employees of Certain Employers at the U.S. Dept. of Energy Facilities at Oak Ridge, Tennessee, 2007 WL (E.D. Tenn. Feb. 27, 2007). Plaintiff worked for Martin Marietta Energy Systems, Inc. Johnson participated in the retirement plan that was later adopted by BWXT. Upon retirement Plaintiff received a monthly pension. BWXT s employees miscalculated the amount of Johnson s pension his ex-wife would receive. The amount owed to Johnson s ex-wife was paid to Johnson. BWXT discovered the error after Johnson was overpaid $70,

19 Johnson v. Retirement Program Plan for Employees of Certain Employers at the U.S. Dept. of Energy Facilities at Oak Ridge, Tennessee, 2007 WL (E.D. Tenn. Feb. 27, 2007). BWXT informed Johnson they would begin recouping the amount by deducting $ a month until they had collected the entire amount back. No specific provision addressing recoupment is necessary where the breadth of the language giving plan administrator discretion over plan management is broad. 19

20 Eubanks v. Prudential Ins. Co. of America, 336 F.Supp.2d 521 (M.D. N.C. 2004) Restitution in equity is permissible where the action does not seek to impose personal liability on the defendant, but to restore to the plaintiff particular funds or property in the defendant's possession. Court found withholding future disability benefits not to be an equitable remedy, but a remedy at law. 20

21 Phillips v. Maritime Association-I.L.A. Local Pension Plan, 194 F.Supp.2d 549 (E.D. TX 2001) Pension plan beneficiaries sued to recover amounts that were withheld in an attempt to recoup overpaid amounts resulting from failure of administrator to submit the Domestic Relations Orders ( DRO ) for review by the Plan s counsel or actuary. When the pensioners retired early there was no reduction or review of the DROs to determine what amounts were to be payable. The result was that the spouses received non-actuarially correct amounts for up to seven years for some beneficiaries. 21

22 Phillips v. Maritime Association-I.L.A. Local Pension Plan, 194 F.Supp.2d 549 (E.D. TX 2001) The Court reasoned that the plan administrator violated the reasonably prudent person standard when she (1) failed to follow advice of plan counsel, (2) failed to submit the DROs to the Plan actuary, (3) represented to Plaintiffs that the stated amounts were the amounts to be received. As a result of this breach, the Court did not allow Maritime to recoup the amounts paid but did allow the actuarial reduction the QDRO s provided. The Plaintiffs knew nor had no reason to know that the monthly benefits were incorrect. 22

23 Sheward v. Bechtel Jacobs Co. LLC Pension Plan for Grandfathered Employees, 2010 WL , at *6 (E.D. Tenn. Mar. 4, 2010) Plaintiff alleges that the Plan administrator breached its fiduciary duty by erroneously and negligently miscalculating his pension benefits and sought a declaration that BJC has breached its fiduciary duties. Plaintiff argues that he made his long-term retirement plans relying upon the erroneous calculation. The plan document, specifically provides that the plan administrator has the responsibility to correct errors. Failure to correct the error and recover the overpayments would have violated its fiduciary duty to act on behalf of the trust and in the interests of the remaining participants and beneficiaries. 23

24 Sheward v. Bechtel Jacobs Co. LLC Pension Plan for Grandfathered Employees, 2010 WL , at *6 (E.D. Tenn. Mar. 4, 2010) Based upon the Plan documents, the applicable case law, and the undisputed facts, the court finds that the decision by BJC to recoup the overpayments made to Sheward was reasonable and supported by substantial evidence. No equitable estoppel because the undisputed facts show that the plan administrator did not have knowledge that Plaintiff s pension calculation was incorrect at the time of the representation to him. Further, Plaintiff was unable to show that he would suffer an inequitable hardship if BJC is allowed to recoup the overpayment 24

25 Phillips v. Brink s Co., 632 F.Supp.2d 563 (W.D. Va. 2009) The administrator of a pension plan mistakenly failed for almost seven years to deduct from the plaintiff's monthly disability benefit the value of his union pension. Although the court concluded that the administrator's interpretation of the plan allowing it to make such deductions was plausible, equitable considerations prevented recoupment of amounts previously paid in error. 25

26 Equitable Lien By Agreement Constructive trust; no current possession of specific funds required. Cusson v. Liberty Life Assurance Co., 592 F. 3d 215 (1 st Cir. 2010); Thurber v. Aetna Life Ins. Co., 712 F.3d 654, 664 (2d Cir. 2013) cert. denied, 134 S. Ct. 2723, 189 L. Ed. 2d 778 (2014); Funk v. CIGNA Grp. Ins., 648 F.3d 182, (3d Cir. 2011); Longaberger Co. v. Kolt, 586 F.3d 459 (6 th Cir. 2009); Gutta v Standard Select Trust Insurance Plans, 530 F. 3d 614 (7 th Cir. 2008); AirTran Airways, Inc v. Elem, 767 F.3d 1192 (11 th Cir. 2014); Trustees of the Nat l Elevator Industry Health Benefit Plan v. Montanile, 593 Fed. Appx. 903 (11 th Cir. 2014), cert. granted, 135 S. Ct (2015) Current possession of specific funds required. Bilyeu v. Morgan Stanley Long Term Disability Plan, 683 F.3d 1083, (9th Cir. 2012) Actual possession of funds required at some point in time. FELRA & UFCW Health & Welfare Fund v. Dove, 2014 WL , at *4 (D. Md. Nov. 13, 2014)(direct payments to service providers) 26

27 CONSIDERATIONS RELATING TO MULTIEMPLOYER PENSION PLANS Defined Benefit Plans Benefits are typically paid as annuity so overpayments can almost always be recovered using the Adjustment of Future Payments Method in EPCRS. Overpayments often result from failure of participant to advise plan of return to work so that benefits may be suspended. 27

28 CONSIDERATIONS RELATING TO MULTIEMPLOYER PENSION PLANS All Plans No ready source for make whole contributions to plan if overpayments not collected since plan sponsor is Board of Trustees. Separation of plan from union and employer may result in errors or permit deliberate misrepresentations to go undetected, e.g., marital status, death of retiree, deliberate overpayment by employer. Complexity resulting from mergers, multiple benefit schedules, multiple employers for each employee, reciprocity, incomplete records may result in computation errors. 28

29 PLAN DRAFTING CONSIDERATIONS Express right to offset against future payments or otherwise pursue recovery. Affirmative participant obligation to repay. Express equitable lien by agreement/constructive trust, without need for current possession of specific funds. No-fault provision: neither a condition nor a defense. Waiver of reliance or estoppel as a defense. 29

30 PARTICIPANT DEFENSES Hardship recoupment of the overpayment would detrimentally impact finances. Equitable Estoppel five factor test (Tregoing v. American Community Mut. Ins., 12 F.3d 79, 83 (6th Cir.1993)). Breach of Fiduciary Duty more than just a miscalculation of participant s benefits(sheward v. Bechtel Jacobs Co. LLC Pension Plan for Grandfathered Employees, No. 3:08-CV-428, 2010 WL , at *4-5 (E.D. Tenn. Mar. 4, 2010)). No Participant Involvement. 30

31 PARTICIPANT DEFENSES Dandurand v. Union Life Ins.Co., 100 F. Supp. 2d 178 (D.Me. 2001) the traditional equitable action for restitution is part and parcel of ERISA's federal common law. what factors weigh against restitution? 31

32 PROPOSED LEGISLATION LIMITING PLAN RECOVERIES Restoring Pension Promises to Workers Act of 2007 (S.1725, 110th Congress), introduced by Senator Harkin, proposed limitations on a pension plan s ability to collect money from pension recipients for overpayments. Protect Pensioners from Unreasonable Recoupment Act proposed but not introduced by Senator Warren. Proposed to amend ERISA but not Code leaving plans subject to disqualification. 32

33 Treasury/IRS Invite Comments on EPCRS Overpayment Rules by July 20, 2015 Rev. Proc noted that IRS intends to make further revisions to EPCRS re correction of Overpayments and requests comments on Whether/when correction should require employer make-whole contributions rather than recoupment; Whether guidance should be provided on Overpayments relating to benefit calculation errors and whether correction should follow rules similar to PBGC recoupment rules; Whether additional guidance is needed re calculation of interest on Overpayments for benefit calculation errors; Whether any other changes or guidance is needed re recoupment of Overpayments including circumstances when full recovery should not be required. 33