Congressional proposal would limit when retirees must return pension overpayments

  • When overpayments happen, it can be years before the plan discovers the error.
  • Retirement legislation pending in Congress would prohibit plans from seeking to recoup overpayments if the first instance occurred more than three years earlier.
  • The IRS also recently issued guidance that would make it easier for plans to adhere to regulations without having to go after retirees for overpayments.

For some retirees, getting a large pension payment can become a big problem.

Let's say a pension plan mistakenly has been paying a participant too much and requires the person to pay back the money, typically through reduced future payments. That can cause many a retiree a lot of hardship. However, a congressional proposal aims to minimize when that happens and how much participants can be on the hook for.

"There are some plans that really go after retirees to try to restore this money, even though it's the plan's fault that the person was overpaid in the first place," said Anna Tabor, director of the Pension Action Center at the University of Massachusetts Boston. "If you're trying to make ends meet and then someone out of the blue says 'oh sorry, you owe us $50,000,' it's devastating."

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Roughly one-third of older adults receive income from a pension plan, according to the Pension Rights Center. The median private pension benefit for those age 65 or older was $10,788 annually in 2019.

Pension calculations can be complicated, said David Godofsky, chairman of the retirement and insurance committee at the law firm of Alston & Bird.

"It's a relatively common phenomenon to see that an error has occurred in calculating somebody' s pension," Godofsky said. "Sometimes the person is underpaid and the error is caught and the payment is increased.

"But sometimes someone is overpaid."

In many cases, participants would have no way of knowing their payment is wrong, Tabor said. And even if a participant notices their payment is higher than expected and they check with their plan, they can be told it's accurate.

And then, down the road when the mistake is discovered through an audit, the retiree is asked to repay the amount. Sometimes, that has reached into the tens of thousands of dollars or more, Tabor said. And, there is no legal limit to how many years of mistaken payments can be counted toward the recoupment, she said.

The legislative proposal to minimize the impact on retirees is part of bipartisan retirement legislation pending in Congress. The provision would prohibit plans from seeking recoupment if the first overpayment occurred more than three years before the participant (or beneficiary) is notified in writing about the error. Additionally, plans could charge no fees or interest alongside the recoupment, and the amount being paid back yearly could not exceed 10% of the amount the person was overpaid.

Some pension plans are better at protecting their participants from recoupment, Tabor said. In other words, they may limit how far back they'll reach in their overpayment calculation, or they may limit how much they would cut the retiree's benefit.

The IRS last week issued guidance that may reduce when pension plans are compelled to fix the error. Basically, it will be easier for them to adhere to federal regulations without having to go after retirees for the money. However, plans could still go that route if they chose to, experts said.

Regardless, companies generally don't want to have to recoup money from their retirees, said Godofsky, whose clients are employers.

"Their perspective is that they don't want to destroy the lives of retirees," Godofsky said. "They just don't."

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