Among the provisions of SECURE 2.0 (effective December 29, 2022) welcomed by plan sponsors were the additions to the Internal Revenue Code that allow qualified plans to refrain from trying to recoup an “inadvertent benefit overpayment” (referred to here as an IBO), and from having to restore such payments to the plan. In addition, the Code was amended to permit the treatment of such overpayments as eligible rollover distributions for certain purposes.

The IRS has now addressed, via interim guidance in Notice 2024-77 issued and generally effective October 15, 2024, some of the many questions that arise under the new Code IBO relief provisions. Before that date, a reasonable good faith compliance standard applies, and after that date following the guidance in the Notice will be considered compliance. Comments on the new guidance may be made to the Treasury Department by December 16, 2024. The following is a general summary of the major points of guidance in the Notice:

IBO definition. An IBO is defined by the Notice as an “eligible inadvertent failure” consisting of a payment from a qualified plan that either (A) exceeds the amount that should have been payable under the terms of the plan or (B) exceeds a Code or regulatory limitation. The requirement that the overpayment be an eligible inadvertent failure means it must have occurred despite the existence of established practices and procedures as described in Revenue Procedure 2021-30, the current IRS EPCRS plan correction standards, and that it not be egregious, relate to diversion or misuse of plan assets nor be directly related to an abusive tax avoidance transaction. An IBO also encompasses payments made before a proper distribution date under the plan and Code, excluding any overpayments made to “disqualified persons” as defined in the prohibited transaction provisions of the Code or to any owner-employee. The term also excludes any payment made as part of a correction for another failure under the EPCRS correction procedures.

Coordination with EPCRS. The EPCRS plan correction standards are amended to be consistent with the Notice. But note that if a plan opts to forego recoupment of an overpayment any related operational failures must still be corrected. These could include scenarios in which the overpayment resulted from incorrect account allocations, resulting in the underpayment of benefits to other participants, or where the overpayment causes an impermissible forfeiture under Code Section 411.

Recoupment compliance. If, despite the available recoupment relief, a plan still seeks recoupment of an IBO, it must do so under the EPCRS overpayment correction standards and the provisions of ERISA (as amended by SECURE 2.0) regarding the limitations on recoupment.

Eligible rollover treatment of IBOs. An IBO transferred to an eligible retirement plan will be treated as an eligible rollover distribution under the Code (with corresponding excise tax relief for early withdrawals and excess contributions) if the payor plan does not seek recoupment of the overpayment and if the payment otherwise qualifies as an eligible rollover distribution. In such cases, the overpayment cannot have resulted from a compensation limit failure under Section 401(a)(17) or an annual additions failure under Section 415. Eligible rollover distribution treatment also applies if the payor plan attempts to recoup the overpayment, and the overpayment is repaid to that plan. If the plan does seek recoupment, it must notify the payee that any amount not returned to the plan will not be eligible for tax-free rollover treatment.

Other portions of the Notice clarify plan corrections when an overpayment results from violations of Code Sections 436, 401(a)(17), or 415 and states that a plan may not correct an IBO by retroactively amending the plan to increase benefit payments already made if that amendment would result in a violation of Sections 401(a)(17) or 415 for a past year. Similar guidance applies to any retroactive amendments that increase past benefit payments in a way that violates Code Section 436 for the past year.