The Consolidated Appropriations Act of 2023, which was signed into law on December 29, 2022, includes numerous provisions impacting retirement savings plans, which are collectively referred to as SECURE 2.0.

SECURE 2.0 amends both the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (Code) to provide relief for the recovery of inadvertent overpayments and to impose limitations on how plan fiduciaries may proceed with the recovery of inadvertent overpayments. These rules apply to both defined benefit and defined contribution retirement plans.

Immediate Action Required. Sponsors of retirement plans subject to ERISA should review the impact of the new overpayment rules on plan procedures and policies and before taking any action after December 29, 2022 to recover benefit overpayments. In addition, plan sponsors should review the provisions of their third-party service provider agreements to determine how the new rules may impact the service provider’s obligation to reimburse the plan in the event the provider’s error caused the overpayment; often the agreement requires the plan fiduciary to first seek recovery from the participant or beneficiary.

The new overpayment rules apply to “inadvertent” benefit overpayments for which the participant or beneficiary bears no responsibility for the overpayment based on misrepresentations or misstatement, or knew the overpayments were materially in excess of the correct amount due under the terms of the plan.

ERISA Fiduciary Relief. SECURE 2.0 amends ERISA to permit responsible plan fiduciaries to exercise discretion in determining whether or not to seek recovery of an inadvertent overpayment from (i) any plan participant or beneficiary, (ii) the plan sponsor or contributing employer, or (iii) any fiduciary of the plan (other than a fiduciary whose breach of its duties resulted in the overpayment). SECURE 2.0 makes it clear that if a plan has established prudent procedures to prevent or minimize overpayments and the plan fiduciary followed those procedures, then an inadvertent overpayment is not a breach of fiduciary duty.

General Limitations on Overpayment Relief under ERISA. SECURE 2.0 does not relieve a plan fiduciary from recovering any amounts necessary to restore an impermissible forfeiture from a participant’s or beneficiary’s account under an individual account plan. Further, the failure to recoup inadvertent overpayments may not adversely affect the ability of a defined benefit plan to pay benefits due to other participants and beneficiaries, and in no event does SECURE 2.0 relieve a plan sponsor from satisfying a plan’s minimum funding requirements.

Specific Limitations on Recoupment from Participants and Beneficiaries. The changes made by SECURE 2.0 provide a number of limitations on a plan fiduciary’s ability to seek recoupment of inadvertent benefit payments from participants and beneficiaries.

• No interest or other amounts, such as collection fees, may be charged.
• Recoupment may not be sought if the first overpayment occurred more than three years before the participant or beneficiary is first notified in writing of the error.
• If recoupment of annuity overpayments is being made by reducing future payments, then
  • The reduction must cease when the full dollar amount of the overpayment has been recovered.
  • The amount recouped each calendar year may not exceed 10% of the full dollar amount of the overpayment.
  • Future benefit payments may not be reduced to below 90% of the amount of the periodic amount otherwise due under the terms of the plan.

• Recoupment of amounts other than annuity payments will be subject to requirements to be developed by the Department of Labor.
• Recoupment efforts may not be accompanied by threats of litigation, unless the fiduciary determines there is a reasonable likelihood of success to recover an amount greater than the cost of recovery.
• Recoupment is NOT made through a collection agency or similar third party, unless the participant or beneficiary ignores or rejects efforts to recoup the overpayment after either a final judgment or settlement authorizing recoupment.
• Recoupment of a participant’s overpayment may not be sought against a spouse or other beneficiary.
• A participant or beneficiary must be entitled to contest the recoupment pursuant to the plan’s ERISA compliant claims procedures.

Overpayment Relief under the Code. SECURE 2.0 amends the Code to provide that a plan will not lose its qualified status merely because it fails to recover an inadvertent benefit overpayment or amends the plan to increase past benefits or decrease future benefit payments to the affected participants and beneficiaries. A plan sponsor must, however, observe any limitations imposed by Code section 401(a)(17), the annual compensation limit, and Code section 415, the limit on annual additions or annual benefit payments. The IRS is authorized to provide guidance on how these limits are enforced in connection with recouping benefit payments, as well as satisfying other qualified plan requirements.

Protection of Rollovers. SECURE 2.0 amends the Code to authorize as a permissible rollover amount any inadvertent benefit payment made to an eligible retirement plan, provided the payment otherwise satisfied the rollover rules. This change provides relief for participants and beneficiaries from potential adverse tax consequences from their rollover of inadvertent overpayments. Further, the amendment treats as a permissible rollover, the return of any overpayment to the plan from the rolled over amounts.

Retroactive Relief. SECURE 2.0 authorizes a plan fiduciary to rely on (i) any determinations made prior to the enactment of SECURE 2.0 not to seek recovery of all or any portion of an inadvertent benefit payment, and (ii) a reasonable good faith interpretation of the prior guidance regarding the recovery of inadvertent benefit overpayments. In addition, any recovery of overpayments that was in place prior to the enactment of SECURE 2.0 may continue after the effective date.

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