Information Center

Pension Benefit Overpayments – What is Recoupment?

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Overview

I received a letter from my pension plan stating that it has been overpaying me. The letter says that the plan is going to reduce my monthly payments and that I will also have to pay an additional amount to the plan. What can I do?

Believe it or not, sometimes pension plans make mistakes when they calculate a participant’s benefits. Sometimes, the benefit is smaller than it should be. In such cases, the IRS has long taken the position that the plan must correct the benefit calculation going forward and make the participant whole by paying the amount the participant was short-changed until the error was caught and corrected, plus interest.

Sometimes, though, the miscalculation results in a larger benefit than the participant is entitled to under the terms of the plan. In most cases, the participant was unaware that they were being paid too much and in no way contributed to the plan’s error. If the plan did not catch its error early, the sum of the overpayments can be significant—we have seen cases where the overpayment is in six-figure territory.

So, what happens when a plan finally catches its error?

The first thing a plan will do is reduce the benefit going forward to the correct amount. Beyond that, pension plans can try to take back – or recoup – the overpaid benefits, but what actions a plan can take to recoup overpaid benefits depends on when the plan caught its error.

The timing of when a pension plan catches an overpayment matters for two reasons. First, in 2023 the laws covering pension overpayments changed significantly, so if a plan caught its error after 2023, it must follow the new rules. Second, these new rules significantly limit what corrective actions a pension plan can take if it took more than three years to catch an error.

What are Common Recoupment Situations?

Overpayments most often occur when:

• A plan miscalculates a participant’s benefits.
• A participant receives income from some other source, such as disability benefits or Social Security, that should have reduced the pension benefit according to the rules of the plan.
• An early retiree in a multiemployer plan returns to work in the industry or trade in the geographic area covered by his or her plan, and the retiree’s benefits should have been suspended under the plan’s rules.
• An early retiree receives a special benefit equal to Social Security that was supposed to end at age 62, but the plan did not stop the special benefit.
• The Pension Benefit Guaranty Corporation (PBGC) takes over a plan and takes several years to determine whose pensions must be reduced to conform to the PBGC’s guarantee limit. During that time, any retiree whose pension is above the agency’s guarantee limit is being overpaid.

The law before 2023:

Before 2023, pension plans interpreted IRS rules to require them to recoup all overpayments, even when the person who received the overpayments was not at fault. This meant that plans could face serious tax consequences if they didn’t recoup benefit overpayments.

There weren’t many limitations on what a plan could do to recoup an overpayment. This meant that, in addition to reducing benefits to the correct payment level, pension plans would cut future benefit payments to offset past overpayments and/or send letters to overpaid individuals seeking a lump sum repayment. Some plans would charge interest on overpaid amounts when calculating what was owed back to the plan. And in some extreme cases, plans would cut benefit payments entirely, send letters threatening to sue people for the overpaid amounts, or even use debt collectors.

The Pension Rights Center worked with stakeholders throughout the retirement community and with Congress to develop a new law that is much fairer to overpaid people who did not know that they had been receiving too much. This new law was part of a much larger retirement legislation called Secure 2.0, which passed in late 2022.

Current Law

The new recoupment rules under Secure 2.0 are now in effect and protect overpaid individuals as long as the plan has not commenced collecting a benefit overpayment before January 1, 2023.

First, it said that plans generally could choose not to recoup without risking adverse tax consequences.

And second, it created new protections on overpayments, unless the participant or beneficiary is “culpable,” which essentially means they were partly responsible for the error. (More on culpability in a moment.) The most important of the new protections are:

1. A plan cannot charge interest on overpayments.
2. A plan cannot reduce future payments by more than 10% of the correct benefit amount and cannot reduce an annual payment by more than 10% of the total of the overpayments.
3. A plan cannot recoup any overpayments at all if the plan did not discover its error within three years of the first overpayment.
4. A plan cannot generally use a collection agency unless the plan has a judgement from a court, or the parties have entered into a settlement agreement entitling the plan to recover overpayments.
5. The plan must allow the participant to use the plan’s claims procedures to contest a recoupment action.

How Do I Know If I Am Culpable?

An individual is culpable if he or she “bears” responsibility for the overpayment, by, for example, making representations or omissions abut information that led to the overpayment, or if the individual is aware that the payments were “materially in excess of the correct amount.”  We believe that there will be factual and legal issues surrounding the meaning of the term “culpable” in the statute. For example, when does an individual know that overpayments are materially in excess of the correct benefit calculation?

What should I do if I receive an overpayment notice from my pension plan?

• Don’t panic.

• Check the plan’s new calculation.

• • Ask the person running your plan to explain how the mistake happened;

• • Ask to see both the old and new calculations of your benefit; and

• • Compare the plan’s new figure with benefit statements you have received.

• • Make sure that the pension plan administrator is aware that the IRS does not require plans to recoup overpayments and of the new legal protections. 
  • Ask for a hardship waiver if the reduction in your benefit will cause you financial hardship or if the plan is asking for a lump-sum repayment that you cannot afford to pay.  Many plans will consider such a waiver.

• Seek help.

• • There may be a pension counseling project, legal services provider, or government agency that can:

• • • Help you check the plan’s calculation;

• • • Help you file a hardship waiver, which may require writing a letter or filling out a complicated form that is several pages long;
    • Negotiate with the plan on your behalf for a less burdensome repayment schedule, if your hardship waiver is denied; and

• • • Advise you whether the plan is likely to sue you if you do not respond to a demand for repayment of a lump sum. (In many cases, a lawsuit would not be worth the cost to the plan.)

• • Regional Pension Counseling and Information Projects provide free legal assistance to anyone with a question about their retirement plan in 30 states. They have years of experience in handling recoupment cases and can advise you on your legal rights and options.

• • If you do not live in a state served by a pension counseling project, PensionHelp America, an online referral service, can direct you to a legal services provider or government agency in your area that may be able to help.

• • You can also call the Pension Rights Center at 1-888-420-6550.

Reliance

In some cases, a participant has made retirement decisions based on the plan’s calculation of benefits. It is possible that in some cases, the participant might be able to sue the plan or the plan official responsible for the miscalculation.  You will probably need to consult with an attorney in such cases.

Learn more about recoupment here. 

Read about recoupment success stories

• South Central Pension Rights Project saves a retiree from a $120,000 recoupment.
• Upper Midwest Pension Rights Project helps widow avoid recoupment for overpayment.
• A Michigan hospital forgives overpayments — at least temporarily — for more than 200 retirees.
• A steel company forgives overpayments to 79 widows.

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