As we have previously posted [See: https://www.boutwellfay.com/post/secure-2-0-makes-big-changes-to-recoupment-of-overpayments] Secure 2.0 significantly changed the rules for correction of overpayments from qualified retirement plans (including 403(b) plans and governmental plans). The Internal Revenue Service has just issued Notice 2024-77 (See: https://www.irs.gov/pub/irs-drop/n-24-77.pdf) (the “Notice”), providing new interim guidance regarding the tax issues raised by these changes, specifically with respect to the impact on correction of inadvertent benefit overpayments under the Employee Plans Compliance Resolution System (“EPCRS”).
The new overpayment rules became effective immediately upon Secure 2.0’s enactment in December 2022 (regardless of when the overpayment was made). Until further guidance is issued, plans may use a good faith, reasonable interpretation of these statutes in their operations (and following the new Notice is deemed to comply with that standard).
Note – we are still waiting for guidance from the United States Department of Labor with respect to recoupment of overpayments (and additional guidance from the IRS), so stay tuned, more guidance is forthcoming.
Notice 2024-77 Highlights
The new guidance clarifies the following:
An “inadvertent benefit overpayment” can be due to a payment made from a plan that exceeded the amount payable under the terms of the plan or a limitation provided in the Code or regulations, or a payment made before a distribution is permitted under the Code or under the terms of the plan. However, an inadvertent benefit overpayment does not include:
a payment made to a disqualified person as defined in section 4975(e)(2) of the Code or an owner-employee as defined in section 401(c) of the Code, or
a payment that is made pursuant to a correction method provided under EPCRS for a different qualification failure.
In general, corrective payments are no longer required under EPCRS with respect to overpayments. However, corrective payments may be required to satisfy funding-based benefit restrictions (including certain section 436 failures, as described in the Notice), or where a corrective payment is needed to make another participant whole or to avoid an impermissible forfeiture.
Although plans may no longer be required to seek recoupment of overpayments for tax purposes, they may still choose to do so in a manner that is consistent with the ERISA Title I restrictions added by Secure 2.0. More guidance on those provisions is still needed.
With respect to rollovers, if no recoupment of an inadvertent overpayment is sought, the overpayment will still be treated as eligible for rollover (if payment would have been eligible but for the overpayment) and thus, under existing law, would not result in an excess contribution to an IRA or resulting excise tax. However, under the new guidance, if recoupment of overpayment is sought by the plan, the rollover will not be treated as an eligible rollover distribution. Furthermore, the Notice clarifies that an inadvertent benefit overpayment that occurred as a result of a section 401(a)(17) or 415 failure that would otherwise have required a corrective payment under EPCRS (see section 6.06 of Rev. Proc. 2021-30) will be treated as an inadvertent benefit overpayment for which recoupment is sought regardless of the plan’s decision and is also not treated as an eligible rollover distribution.
The bottom line
Notice 2024-77 provides helpful guidance with respect to the IRS’s position on the new overpayment rules under Secure 2.0, but the rules are complicated, and more guidance is expected both from the IRS and the DOL, as well as the courts.
If you have any questions about Secure 2.0 overpayment rules, contact a Boutwell Fay attorney at attorneys@boutwellfay.com.
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