Unreported deaths are increasing. The decline of the Death Master File and the rise of disparate data sources have made it more challenging than ever for pension plans to identify decedents and locate missing participants/beneficiaries. But inaccurate data can lead to costly overpayments that could threaten the longevity of the fund.
In our webinar, industry experts explained best practices for preventing overpayments, partnering with your beneficiaries when an overpayment is made, what the regulations and SECURE 2.0 require, and the rights of the pensioner.
Norman Stein, Pension Rights Center, delves into the rights of beneficiaries and considerations during an overpayment situation. Brigen Winters, Groom Law, discusses the regulatory landscape and implications for pension administrators handling overpayments. Mike Schoonveld, The Berwyn Group, explains how to prevent overpayments by finding unreported decedents.
To watch/listen to the webinar go to: Overpayments webinar video.
Webinar script:
Trend: The demise of the Death Master File
The decline of the Death Master File began in 2011 when state data became limited due to fears of identity theft. The DMF data has continued to decline each year since. In 2023, the DMF provided only 16% of death records. This degradation has caused conducting death audits for pension plans a much more complex task. Death audits now require the aggregation of thousands of data sources, primarily obituaries. Learn more the DMF: Death Audit vs Death Data.
How do overpayments happen and what regulations have changed?
It’s important to start with kind of the state a play before then because some of those rules still carry over and create some of the uncertainty that occurs now as we wait for more regulatory guidance on Secure 2.0. It’s been a longstanding kind of issue that retirement plans have struggled with on how or whether to correct inadvertent benefit overpayments. They’ve tried to balance fiduciary obligations to the plan and other participants with issues of fairness to the recipients and issues of equity and as well as administrative practicalities and complexities.
Prior to Secure 2.0 both the Department of Labor and IRS guidance generally required fiduciaries to make reasonable attempts to recover overpayments and make the plan whole depending on certain circumstances and that really stemmed from a couple different legal requirements.
One under the fiduciary rules of ERISA which require plan fiduciaries to discharge their duties in accordance with the plan documents as well as general fiduciary duties and under those rules the Department of Labor had advised that there was under the duty of prudence some requirements on attempting to seek amounts erroneously paid from the plan. In addition, under the Internal Revenue code which requires plans to follow plan terms.
There was concern that overpayments could theoretically disqualify the plan to the extent they were not in accordance with the plan and there was guidance from the IRS most notably under the employee plans compliance resolution program that suggested that sponsors do need to attempt recovery of all the overpayments to maintain the tax qualified status of the plan.
There was an important distinction between the IRS correction procedures and the Department of Labor’s View. For example, if the costs of collection were going to be extreme relative to the amount that was going to be collected the plan didn’t have to try and collect and the Department of Labor also from time to time had suggested the plan could consider hardship to the participant in deciding whether to recoup.
Both the IRS correction procedures and Department of Labor said you didn’t have to recoup against participants you had to get the money from somewhere so if a third-party administrator made a calculation error the plan would actually have a choice subject to contractual restrictions in the contract between the service provider in the plan.
The IRS took a position though that the plan risked disqualification if it did not attempt to recoup and that meant plan sponsors and plans really didn’t have too much of a choice.
One set of concerns came from people who sponsored the plan who said basically I don’t I don’t want to have to go after a participant who had nothing to do with the error and it’s going to create hardship to the participant down the road if I try and recoup benefits when the participant didn’t know that they were getting more than they were supposed to get. The IRS did make some changes over time to suggest circumstances in which the plan did not have to recoup.
What are the requirements of a pension plan and participants when an overpayment is discovered?
Secure 2.0 framework a plan fiduciary is treated as not violating ERISA if the fiduciary determines not to seek recovery of an overpayment subject to a couple of limited caveats including in the case of a defined benefit pension plan the failure to collect the overpayments cannot materially affect the plan’s ability to pay other benefits and that you’re taking into account the application of the minimum funding rules and where the plan stands.
If there was a fiduciary breach involved that resulted in the overpayment, then there may be an obligation of the plan to pursue that fiduciary but if there’s established procedures to prevent overpayments and if the fiduciaries follow those procedures, then overpayment will not give rise to a breach.
On top of that Secure 2.0 also provides that if a plan fiduciary still chooses to reduce future benefit payments to correct an overpayment or seek recovery of that overpayment it can still qualify for relief under the statute, but it provides a series of conditions and limitations.
One of the things that I think is sort of important when thinking about overpayments was the idea that the plan actually had a loss when it overpaid benefits. The plan isn’t the one that suffers a loss in most cases in a defined benefit plan and the reason the plan doesn’t suffer a loss is because plans are subject to the funding rules and the plan is funding the miscalculated benefit. So the plan is actually better off financially and thus it’s not really the plan that has suffered the loss, it’s the plan sponsor that has suffered the loss.
When it finds an overpayment, it immediately changes the benefit to the correct amount so the participant is no longer going to be getting the overpayment in the future and you can’t charge participants interest on an overpayment any longer.
If the plan doesn’t catch the error within three years, it cannot collect overpayment and it can be required to reduce the benefit to the correct amount, but it cannot go back and try to recoup the overpayment. This creates a real premium for plans to catch the overpayment quickly and not wait 15 or 20 years. If there’s a death benefit to the beneficiary is a lump sum, can you offset that any overpayment with the death benefit that’s paid.
Even before Secure 2.0 there was a view that you probably couldn’t collect overpayments made to a participant from the participants FAL beneficiary right that they’re two separate benefits so if if you were overpaying a participant and the participant died you might have a claim against the estate but you couldn’t reduce the spouse’s survivor benefit to recoup what was overpaid to the spouse to the participant spouse and that’s baked in is one of the I think first seven conditions in the new statutory framework under security 2.0 now.
Of course we’ll probably get into this more later. I think the trick comes up where the participant or beneficiary was culpable for the overpayment, and we don’t have guidance on this yet and I think that’s something that plans are struggling with.
One question that came from the audience was Proof of Life affidavits a good idea worth the effort and is suspending benefits due to lack of response appropriate?
One of one of the problems with the statute with Secure 2.0 is that’s going to have to be worked at over the next several years unfortunately probably through litigation rather than regulation is what do we mean by non-culpable participant because if you’re a non-culpable participant you get these protections if you’re culpable in one way or another you knew about the error and didn’t tell the plan or you contributed to the error by giving the plan false information or cashing a check after a participant dies for example.
That’s going to have to be worked out and we recently saw a case at the Pension Rights Center where the participant who came to us had suffered significant brain injury requiring operations and after the operation she had significant cognitive impairment and was almost fully blind and she was unaware of a plan provision that said when you get Social Security benefits we’re going to reduce your benefit if there’s a supplement that’s paid until you get Social Security disability benefits and the plan said she didn’t let us know and she said I didn’t understand all this even though there was a paragraph in in the plan in the summary plan description.
So question was whether culpability was going to be determined based on the individual when the individual itself was culpable from a subjective viewpoint or whether there was going to be an objective standard and fortunately the plan had sympathy for her and we didn’t have to litigate but I think that the issue of what we mean by culpable is likely to come up and the statute doesn’t really give a complete definition.
Some of those elements like the case Norman just talked about where the spouse or beneficiary just keeps collecting the life payments that were due to the participant and didn’t notify the plan for some period of time and that’s where it gets trickier and tougher for a plan to say that there wasn’t culpability there.
The protections for participants don’t excuse the plan when you’re talking about a section 415 violation or 417 violation you still have to attempt to recoup against people who get larger benefits than the maxim that they’re permitted under the code.
Is there anything that you see coming in the future with respect to overpayment regulations?
We are waiting for more guidance it’s not clear how quickly that guidance will come out it’s a very complicated area and Secure 2.0 kind of built upon the first secure 1.0 just a few years before and has led to just a whole ton of both required and needed regulatory guidance initiatives both from the Department of Labor and the IRS and treasury so I think there’s quite a lot of backlog there was a lot put on their plate not clear how quickly all that will come out.
A couple areas on which to be on the lookout for guidance include new rules under these the new Secure 2.0 conditions and limitations. Unclear when we’ll see that guidance as well as there were several Provisions including this one under that affects the self-correction provisions. I indicated there were rules in place under those pre 2.0 conditions are provisions that will need to be updated for Secure 2.0.
In addition, there was a separate section of Secure 2.0 that significantly expanded those self-correction provisions for inadvertent errors, so I think all of that’s going to need to be updated I know that’s on the IRS business plan, but that’s another area on which to look for future guidance.
One of the things that we generally don’t talk about in this area is defined contribution plans and I think that’s probably an area where we’re going to need some additional guidance about when a plan that makes a mistake in paying a benefit and a defined contribution plan has to go ahead and recoup.
Then there’s also a couple of technical problems that were made drafting errors in the statute so for example there’s a provision which has gotten a little bit of attention. The three-year protection that I mentioned earlier is only available under the protection if there’s no fraud or misrepresentation and the problem that creates is the definition of culpability itself would not include somebody who engaged in fraud or misrepresentation so why is this duplicative language over here wasn’t intended to mean that you get the three-year protection even if you were culpable so long as your culpability didn’t involve for misrepresentation.
I don’t think that’s what that was intended to mean I think it was just a drafting error and you probably don’t get that protection if you’re culpable even without for or misrepresentation just because the general way the statute is written you’re culpable if you knew of the error for example and didn’t you didn’t do anything about it. That’s not necessarily fraud or misrepresentation or if you submitted incorrect information about your birthday or your spouse’s birthday or something among those errors that that arguably fits culpability but would feel fall short of fraud or misrepresentation in most cases.
So that’s something that if there’s a technical Corrections bill, I think will be corrected but if it’s not corrected it may create some problems and that’s going to depend on whether and when we see technical Corrections is largely going to depend on when there can be a vehicle to pass those technical corrections.
There was a staff draft release but that’s not going to happen on its own. It’s going to be dependent probably on there being some kind of big Omnibus Appropriations type bill that would carry with it an unrelated act other provision that’s really helpful.
If you could provide the audience with one recommendation around overpayments what would that be?
Well I think it’s hard to pinpoint one but I think in a very general sense it’s kind of important to revisit in light of what we’ve gone through today kind of the pre security point ERISA and tax environment and overlay the new Secure 2.0 rules I think plans have been and with the record keepers need to kind of revisit their overpayment procedures and make sure they’re taking into account all that’s transpired with these changes within the last two years so I think that’s what we’re advising plans is hard to do and fast kind of plan amendments but it is important to kind of look at your administrative procedures take into account these new rules try try to come up with rules that are administrable and how to apply these.
I think plans struggle with some of these what are as Norman said pretty subjective determinations but just working with your outside vendors your internal plan procedures to implement these new rules and not just keep operating like you did before. Also need to be on the on the lookout for additional guidance I think it’s likely to come in in pieces not all at once so just kind of piecing together the new guidance as it comes out.
I think you really want to look at your procedures you certainly don’t want procedures that aren’t going to discover the error within three years and you want to make sure that your outside providers if they’re doing calculations are really understand what the plan says and it’s a tough area I think for plans.
Maybe this goes back to the other question I think there’s also probably some need for help with what is interest and to put this in the context of your current problem of your current question I think plans should look at or plan sponsors should look at what the plan says about how you calculate interest for overpayments and also look at IRS guidance which had some some rules on this because I’ve seen cases where plans don’t have a definition and they say well we’re going to take our investment performance over the last 10 years and that’ll be the interest rate, I think this is something that should be on the checklist of plans that are reviewing their overpayments.
Does the plan itself provide for interest? If it doesn’t you may not be able to collect interest and if it does you may want to look at what the interest rates are make sure they’re reasonable from the participants perspective and the plan’s perspective. Try to find and include a documented process for identifying decedents identifying missing beneficiaries and staying in touch with them
15 years ago physical checks were sent out. Those checks would come back and provide their own challenges. Plans did a lot of work to move to EFT so direct deposit but what happens when that EFT bounces back and you do not have confirmation of death or you cannot find that person is indeed deceased and therefore asse they’re living. Do you stop the payment and hope that they send a response? Do you continue to try to send the payment even though that’s going to return?
I think this is something that Department of Labor has had a lot of interest in I mean you have a fiduciary obligation try and locate missing participants and this would be a variation I think of on that whether you have to continue going through the really bizarre process of trying to deposit a check in an account that’s no longer there.
I’m not obviously speaking for anybody but myself, but it seems to me that that is a waste to plan resources and you could check with the bank and make sure the account is closed but be beyond that it does seem once the accounts closed using plan resources. But continuing to make the deposits seems something that shouldn’t be required.
Trying to find the participant is something that is required and that’s a complicated area. It’s one on which plans have struggled they would I think plans would like more kind of set black and white requirements or what they need to do in the missing participant situation and not just best practices. They should do more but more in the line of safe harbors because it is a very big problem and it’s one on which the Department of Labor has done quite a bit of kind of audit and enforcement work.
It’s something that a provision in Secure 2.0 and has now been some sub regulatory guidance out of the department it’s I think something sponsors haven’t loved because it’s more billed as a voluntary provision of information kind of outside of the normal 5500 reporting contacts, but it is a kind of an ongoing area on which I think plans and sponsors and Regulators have struggled to find to strike the right balance.
There’s a provision in Secure 2.0 which instructs the Department of Labor to create a plan registry which would have useful information for both for the participants looking for benefits but also in a lot of cases for plans and plan sponsors but the reporting the information that needs to be reported to Department of Labor.
Department of Labor concluded is not sufficient to have a really robust registry so they asked employers if they would voluntarily submit some additional information and I think the response from the plan sponsor community is that’s asking a lot because we’re if there’s a leak in the data once we turn it over Department of Labor, we can be sued and so I I’m not sure what’s ultimately going to happen.
There is litigation when an error is made the secure 2.0 is clear you can reduce the benefit to the correct amount but in some cases participants have argued that they relied on the misinformation it was a fiduciary breach and you shouldn’t be able to reduce the benefit or at least the fiduciary should be responsible for continuing to pay the incorrectly calculated benefit.
There have been maybe five or six cases dealing with those facts, but I know there are lots and lots of other cases that have been settled so that’s something else to kind of think about. When you’re reviewing your procedures, you want to make sure to minimize participant misunderstanding about benefit calculations. I think we see that consistently and a question that did come up is how do you determine when it’s fraud and when it’s just ignorance. They didn’t know so if somebody is receiving the benefit and it should have been reduced by let’s just say 50% because the principal died the primary died and that person’s still receiving 100%.
A is that fraud and B how would you suggest plans keep that in front of those members to ensure that they are very aware that if something happens, they need to let them know because it could reduce their benefit.
I talked a little bit about that earlier with that one case I described with the disabled woman where communication is really important and there are different types errors that plans might make and in some cases the participant is just going to be unaware that there’s anything they can do.
But you want to if you’re a plan you want to have effective communication with participants so that they understand that if there’s a certain event it may affect the benefit and that the plan might periodically communicate with participants reminding them of any obligations and not just do that electronically. It’s really important to make sure to do it both electronically and in writing.
There’s also I think an issue with beneficiary designations. I’m not even sure if you call this an overpayment but a mistaken payment takes place because contested payments take place because somebody has not updated their beneficiary form. They may have had a domestic partner or not a legal one, but they had somebody that they were very close to and they designated them as beneficiary and then they broke up and haven’t had contact for 15 years and adult children or minor children say we should be the beneficiaries.
I think that kind of error is why a plan needs to really try and avoid those sorts of problems by reminding people every couple of years to reconsider their beneficiary designation and so I’m not sure that’s an overpayment problem so much as a parallel kind of problem.
The trend I’m seeing is some of the plan sponsors move away from electric or EFT and back to paper checks. It gives the ability to be able to communicate with that participant and also they would have to physically deposit that check so we think about fraud prevention capability.
It sounds like a something definitely worth thinking about. You I don’t know what the cost is but it is an opportunity to have another communication moment with a participant and that seems to me that that kind of thinking is good for people responsible for administering a plan.
It’s another area that might help address is just the area of cyber fraud or fraud generally where having a physical check may make it a little easier to avoid but not it doesn’t rule it out.
I mean we’ve seen cases where these cyber thieves are very sophisticated these days so I think it a whole other area but a related area on which people are looking at physical checks but still having to be diligent and really training their employees to be on the lookout for fishing schemes because there have been very significant instances of people losing their benefits or losing in other cases settlements due to these basically criminals that are really taking advantage of the new kind of the new world in which we live.
I think one of the questions that came out as well is around the advocacy but also the requirement of a DB plan participants to name a beneficiary prior to commencement and whether that’s the date of hire or throughout their career.
I think I’ve heard you both say any communication you can have is good communication but ensuring that the information you have is the most up to date so if there’s a beneficiary change or a beneficiary designation that identified early and often as those might change as well.
Another thing too is I’ve seen this on occasion somebody gets married and doesn’t tell their employer and they die and there’s a beneficiary. I think in those situations you may want to double check and make sure the participants are not married before you honor the non-spousal beneficiary designation in part because you know the plan may have been in a position where it has to make a double payment. If the benefits are not large it may not be worth a lawsuit.
We do see not only from an overpayment perspective death audit perspective but also the missing beneficiary, bad address information switching away from EFT to a physical check adds a layer but it also adds a challenge as you have to have the right address.
Learn more: How missing and inaccurate participant data impacts a death audit.
Moderator: As we wrap up I’d like to again extend my thanks and appreciation to Norman Stein of the Pension rights Center and Brigen Winters from Groom Law.
