The Treasury Department and IRS released Notice 2024-77, which provides guidance on the new SECURE 2.0 Act rules regarding the recovery of inadvertent benefit overpayments (IBOs) from retirement plans. More specifically, section 301 of SECURE 2.0 added two new sections to the Internal Revenue Code (IRC) related to overpayments: One relates to the qualification requirements in connection with overpayments, and the other relates to whether and when an overpayment may be eligible for rollover.
The SECURE 2.0 Act also added IBO-related provisions to ERISA, but those changes are not addressed in the notice since they fall under the interpretive authority of the Department of Labor.
Benefit overpayments have long been an issue for retirement plans. When these errors occur, plan fiduciaries have been forced to grapple with issues of fairness to participants and administrative practicality, balanced against the need to maintain the retirement plan’s qualified status and the need to fulfill their fiduciary duties under ERISA.
Through the Employee Plans Compliance Resolution System (EPCRS), the IRS has provided a variety of correction methods to address benefit overpayments. The methodologies have evolved and expanded over the years, but they all generally required that the trust be made whole through recoupment from participants and beneficiaries or payment from the plan sponsor or a third party (with some limited exceptions for defined benefit plans).
The SECURE 2.0 Act changes provide more flexibility for plan fiduciaries to decide not to seek repayment from participants or the plan sponsor and add new protections for overpaid recipients when plan fiduciaries seek to recover the overpayments. Although section 301 has been in effect since the end of 2022, the uncertainty over how it would be interpreted generated a number of questions.
The interim guidance in the notice is in the form of questions and answers. Highlights along with references to the specific Q&As are provided below.
IBOs resulting from IRC sections 436, 401(a)(17) or 415 failures.The notice addresses the interaction of IBOs and IRC section 436 (underfunded plan restrictions), IRC section 401(a)(17) (compensation limit) and IRC section 415 (benefit and contribution limits) (Q&A-5, -6 and -7).
More specifically, the notice provides that if a plan has an IRC section 436 failure due to an IBO then, to the extent the plan does not recoup such overpayment from the individual, the plan sponsor or another party must make a corrective payment to the plan, generally following the correction principles under EPCRS for an overpayment that is not an IBO. Similarly, if there is a failure of IRC sections 401(a)(17) or 415 as a result of an IBO, then to the extent the IBO is not recouped from the individual, the plan sponsor or another person must make a corrective payment under the same circumstances as apply under EPCRS.
In the case of IBOs resulting from IRC sections 401(a)(17) and 415 failures, if the IBO was rolled over and not recouped, it will not be treated as an eligible rollover distribution. In contrast, it appears that a distribution that is an IBO because it violates IRC section 436 is treated as an eligible rollover to the extent that the plan sponsor does not seek recovery (Q&A-5).
Q&A-7 provides that a plan sponsor may not amend a plan to increase past benefit payments to affected participants to adjust for IBOs in a way that would result in a violation of IRC sections 401(a)(17) or 415 for a past year. The notice also provides that “[a]n amendment to increase past benefits…that results in a section 436 failure for a past year is permitted only if contributions are made in accordance with section 436(c)(2) and…EPCRS.” The meaning of this last sentence is not entirely clear.
