The IRS asks for comments on this guidance by December 16, 2024.

SECURE 2.0 also made changes to the rules governing recovery of benefit overpayments under ERISA. The DOL has not yet provided any guidance on the ERISA provisions.

Background

When a participant or beneficiary receives a benefit overpayment from a retirement plan, the plan frequently seeks recoupment by reducing future benefit payments to reflect the overpayment in addition to correcting future benefit payments to the proper amount. Where there are no future payments due (e.g., the participant has died or has received a lump sum), the plan will seek repayment from the participant’s estate or beneficiary if it is prudent to do so.

The IRS Employee Plans Compliance Resolution System (EPCRS) specifies the Internal Revenue Code (IRC) rules for correcting overpayments. (See Rev. Proc. 2021-30.) Depending on the nature of the overpayment or the time since the overpayment, the plan generally may correct only by making a voluntary correction program (VCP) submission to the IRS. The recovery of overpayments is a fiduciary duty under ERISA and the plan has an obligation to seek recovery unless such recovery would be imprudent (e.g., cost more to recover than would be recovered).

Recovery from participants and beneficiaries can be difficult and can appear quite unfair when the overpayment occurred through no fault of the participant or the beneficiary or when the plan waits many years before discovering the overpayment and seeking its recovery. The SECURE 2.0 provision was aimed at addressing this.

A plan is not required to seek recovery of overpayments, but it is permitted to do so — subject to the limitations specified under ERISA.

The guidance

Notice 2024-77 provides answers to eight questions in a Q&A format.

It clarifies that an “inadvertent benefit overpayment” is an “eligible inadvertent failure” under EPCRS, as it was amended by SECURE 2.0. The IRS addressed that definition in Notice 2023-43, which we discussed in a June 1, 2023 insight. The term includes payments exceeding plan terms or IRC limits and payments made before a distribution is permitted.

If a plan seeks to recover overpayments, it may do so using EPCRS’s self-correction method in most cases. In the case of a single-employer DB plan subject to benefit restrictions under IRC Section 436 because of poor plan funding, the plan sponsor or another person must make a corrective payment under the same circumstances as apply generally under EPCRS for an overpayment that is not an inadvertent benefit overpayment. No type of plan may self-correct payments exceeding the benefit, and there are compensation limits under IRC Section 415 and 401(a)(17).

If the overpayment has been rolled over or transferred to an IRA or other plan, the overpayment will be treated as a valid rollover provided the plan does not seek recovery. If the plan seeks recovery, the participant or beneficiary may transfer the money from the plan or IRA to which it was rolled back to the plan without penalty. If recovery is sought and not transferred back, the inadvertent benefit overpayment cannot be treated as an eligible rollover distribution and, thus, would be considered an overcontribution to the IRA. In the case of any inadvertent overpayments due to an IRC Section 401(a)(17) or 415 failure that requires corrective payments or contributions under EPCRS, the overpayment is treated as an inadvertent overpayment for which repayment was sought.

Notice 2024-77 specifies the provisions of the current EPCRS that no longer apply in the case of inadvertent benefit overpayments. The IRS will amend the EPCRS Revenue Procedure to show these changes when it next issues a revised Revenue Procedure.

Notice 2024-77 does not address the SECURE 2.0 changes to ERISA. The ERISA changes provide limits on the amounts that can be recovered and relief for fiduciary decisions. The Notice only addresses the meaning of “inadvertent benefit overpayment” for purposes of the EPCRS program and the treatment of such distributions if they have been rolled over to an IRA or another plan.

Applicability

Notice 2024-77 will take effect on the date it is published in the Internal Revenue Bulletin. For periods before then, a taxpayer may rely on a good-faith, reasonable interpretation of the SECURE 2.0 change. With respect to rollovers of impermissible amounts, SECURE 2.0 relief applies as of SECURE 2.0’s enactment on December 29, 2022, regardless of when the inadvertent benefit overpayment was made.

What’s next?

December 16, 2024 is the deadline for commenting on Notice 2024-77 and the effective date provisions.

The IRS is still working on a broader revision of EPCRS, which no doubt will include the changes made by Notice 2025-77.

More significantly, the full scope of the SECURE 2.0 provision will not be known until the DOL issues guidance for the ERISA restrictions.