The IRS has clarified its correction guidance recently to say that errors made in overpaying participants for their benefits can be cured by employer make-up contributions, rather than by pursuing participants and beneficiaries for the overpayments they have received. In issuing this clarification, the IRS has aligned itself with the views of the Department of Labor, which has issued advisory opinions that date back to the 1970s that essentially take the same position.
This avenue of correction is particularly welcome given the apparent reluctance of at least some courts to require repayments by overpaid participants. A federal district court recently allowed a participant to use equitable estoppel as a basis to prevent a pension plan from recovering overpayments and to prevent the plan from reducing future benefit payments. In Paul v. Detroit Edison Co., Case No. 13-14256 (March 30, 2015), the United States District Court for the Eastern District of Michigan found in favor of the plaintiff-participant on the strength of statements by the participant that he questioned a company representative about the accuracy of his benefit computation during his retirement interview and received assurances from the company representative that the calculation was correct. As it turns out, the company representative was mistaken in the assurances he provided to the participant. In reaching its decision, the fact that seemed most relevant to the district court was the failure of the company representative to investigate further after the participant had questioned the original calculation. Prior Sixth Circuit precedent suggests that an estoppel claim needs to be supported by gross negligence amounting to constructive fraud. In the Paul case, the district court found that the company representative’s assurances regarding the accuracy of the original benefit calculation made without further investigating its accuracy following the concern raised by the participant, was conduct sufficiently negligent to amount to a constructive fraud.
The court reached its conclusion favoring the plaintiff despite the fact that the benefit calculation contradicted the governing plan documentation and despite a written disclaimer signed by the participant and his spouse disclaiming any guaranty concerning the accuracy of the benefit calculation provided to him. The court also reached this determination even though the plan administrator, during the administrative claims stage, had agreed to forgo recovery of an excess $14,000 paid as part of a partial lump sum payout and sought only to prospectively adjust the participant’s monthly annuity payment by $54.42 from an original monthly amount of $772.17 to $717.75. The court concluded that the plan could not reduce the plaintiff’s benefits and had to return the plaintiff “to the same position he would have been in had the representations been true.”
The moral of this story for plan administrators and employers alike is to exercise care in its less formal communications with participants about the nature of benefit calculations. From a policy perspective, this is arguably a poor decision because it could have the impact of discouraging plan administrators and employers from engaging in less formal discussions with participants who have questions about their benefit calculations.