IRS Notice 2024-77 Addresses SECURE 2.0 Changes to Plan Overpayments
On October 15, 2024, the IRS published Notice 2024-77, providing guidance with respect to SECURE Act 2.0 changes to the treatment of “Inadvertent Benefit Overpayments.” The guidance in the notice applies with respect to overpayments and rollovers (regardless of the date of overpayment), on the date of issue. For overpayments/rollovers prior to that date sponsors/participants may “rely on a good faith, reasonable interpretation” of the statute.
Background
An inadvertent benefit overpayment is a payment exceeding the amount payable under the terms of the plan or a limitation provided in the Internal Revenue Code (IRC) or regulations, and:
Occurs despite the existence of established practices and procedures,
Is not egregious,
Does not relate to the diversion or misuse of plan assets, and
Is not directly or indirectly related to an abusive tax avoidance transaction.
Regarding plan overpayments, SECURE Act 2.0 changes permit:
plan fiduciaries (subject to certain exceptions) to pursue recoupment/make corrective payments with respect to inadvertent benefit overpayments, and
plan participants receiving overpayments (in certain circumstances) to treat them as eligible rollover distributions.
Generally, where recoupment is either not sought or not obtained, the corrective payment previously required under the IRS’s Employee Plans Compliance Resolutions System (EPCRS) no longer applies. The exceptions to this rule include where the payment results in a:
Payment that violates a defined benefit plan funding-based benefit restriction (IRC §436),
Compensation limit failure [IRC. §401(a)(17)], or
Contribution/benefit limit failure (IRC §415).
There will also be circumstances in which a corrective payment must be made with respect to a “related error.” The notice provides the following example: If a plan participant received an inadvertent benefit overpayment due to an incorrect allocation of a profit-sharing contribution under a plan, another plan participant may have received a benefit underpayment. In this case, the benefit underpayment would be considered an additional failure in need of correction, which may require a corrective payment.
Recoupment, self-correction still allowed
The new rules, however, still permit a plan to seek recoupment, subject to applicable restrictions under ERISA (e.g., no interest charged, recoupment is not sought from any beneficiary (including a spouse) and limits on reductions of future payments, threats of litigation, and use of collection agencies).
Moreover, a plan may “self-correct” by increasing past benefits if certain requirements are met, including compliance with applicable correction procedures and, provided the correction does not violate the IRC compensation limit and benefit limits.
Rollovers
Generally, if the plan does not seek recoupment, the overpayment is treated as an eligible rollover distribution (“… if the payment would have been an eligible rollover distribution but for being an overpayment”). This treatment does not apply to an overpayment that is an IRC § 401(a)(17) or 415 failure” (as described previously). Where recoupment is sought, the participant must be notified of any unreturned portion is not eligible for tax-free rollover treatment.
Summary
Notice 2024-77, effective as of October 15, 2024, provides additional guidance on the changes related to how plan sponsors may handle inadvertent benefit overpayments. More guidance is still needed, and interested parties may submit comments on the notice to the IRS through December 16, 2024. Key points of understanding for plan sponsors:
Processes and procedures regarding recoupment/no recoupment of overpayments,
The current correction methods offered under EPRCRS if recoupment is sought,
What restrictions now apply if recoupment is sought, and
If the plan does not seek recoupment, the overpayment is treated as an eligible rollover distribution.
Sources
(n.d.). Guidance Under Sections 414(aa) and 402(c)(12) of the Internal Revenue Code with Respect to Inadvertent Benefit Overpayments. IRS. https://www.irs.gov/pub/irs-drop/n-24-77.pdf