SECURE 2.0 Act Establishes New Rules for Recouping Retirement Plan Overpayments

The SECURE 2.0 Act of 2022, referred to herein as the Act, established new overpayment recovery rules. When a plan decides to recoup overpayments, the Act establishes limits on recovery amounts, recoupment methods, and the timing of recovery. Prior to the Act, the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) required pension plan fiduciaries to recoup any plan overpayments mistakenly made to participants. The law provided only narrow circumstances in which fiduciaries were not required to do so.  Pension funds would often have no choice but to require retirees to pay back these sometimes significant overpayments—received through no fault of the retiree—creating serious strain particularly because retirees often depend heavily on their pension for necessities.

But thanks to the Act, pension plan fiduciaries are not required to recoup an inadvertent overpayment at all so long as the failure to recover the overpayment would not materially affect the plan’s funding and ability to pay benefits. The Act also limits what pension plan fiduciaries may do to recoup an overpayment from a participant who is not “culpable” for the overpayment, as in the case of fraud. In short, the Act provides essential guidance to ensure that participants and beneficiaries who have received overpayments are protected from significant adverse impacts to their future benefit payments.

In particular, the Act states that a plan cannot charge a participant interest on overpayments received by them, even during the period of time that the participant is repaying the overpayments to the plan. Additionally, when a plan seeks to recoup overpayments by reducing a participant’s future non-decreasing periodic (i.e., fixed pension) benefit payments, the Act limits the amount and duration of the reduction. It states that the amount recovered per year cannot exceed 10% of the amount of the overpayment, and that benefit payments cannot be less than 90% of the full payment amount. The reduction in future benefits may occur automatically, without participant consent, and end automatically upon complete recoupment of the overpayment amount. Alternatively, the Act allows retirement plans to recover overpayments through installment payments that cannot exceed 10% of the ongoing benefit payable to the participant in a given year. The Act anticipates further rulemaking on how pension plan fiduciaries may recoup overpayments for benefits that are not non-decreasing periodic benefits. Moreover, the Act states that a plan cannot recoup an overpayment that occurred more than three years before the recipient received written notice of the error. Finally, the Act enables a plan to consider the financial hardship imposed by the recoupment when considering how much of the overpayment to collect.

For more information on the SECURE 2.0 Act, please contact your benefit plan counsel.