IRS makes first installment on SECURE 2.0 overpayment guidance 

SECURE 2.0 grants retirement plan sponsors and fiduciaries explicit discretion to decide not to recoup certain “inadvertent benefit overpayments” but doesn’t define this term. In Notice 2024-77, IRS says that an inadvertent benefit overpayment arises from a payment that either:

• Exceeds the amount payable under plan terms or a limitation in the Internal Revenue Code (IRC) or a regulation (for example, a benefit limitation under IRC Section 415 or a funding-based benefit restriction for defined benefit (DB) plans under Section 436)
• Is distributed before payment is permitted under plan and IRC terms

The discretion not to recoup under SECURE 2.0 does not extend to overpayments made to disqualified persons (individuals directly connected to the operation of the plan, such as a fiduciary, an employer or a service provider) or to owner-employees, or payments made under EPCRS to correct a different qualification failure.

Under SECURE 2.0, a plan won’t fail to meet the Section 401(a) qualification or 403(b) requirements simply for failing to recoup an inadvertent benefit overpayment or for amendments that increase past or decrease future benefit payments to correct overpayments. The notice clarifies that this doesn’t prohibit plan sponsors or fiduciaries from seeking to recoup overpayment.

Participant safeguards and coordination with EPCRS. SECURE 2.0 added several new safeguards for participants and beneficiaries facing recoupments. (See Correcting retirement plan overpayments under SECURE 2.0 for more information on these protections.) However, SECURE 2.0 added these provisions only to ERISA, without adding similar protective language to the IRC. IRS states explicitly that the notice doesn’t address the new protections, even though certain EPCRS correction methods require repayment terms that conflict with SECURE 2.0. The notice identifies several sections of EPCRS that no longer apply (e.g., certain circumstances no longer requiring corrective contributions — see below), but didn’t make any changes relating to participant protections. Future EPCRS updates presumably will conform to the new requirements, but until IRS updates the program, plan sponsors and fiduciaries facing conflicting guidance may want to consult legal counsel.

Decision to recoup affects rollovers. SECURE 2.0 provides that overpayments rolled over to another eligible retirement plan or individual retirement account (IRA) remain eligible rollovers if the sponsor chooses not to recoup, and the receiving plan or IRA needn’t take any corrective action. If recoupment is sought and the overpayment is returned to the original plan, both the receiving and original plan can treat the amount as an eligible rollover distribution (regardless of either plan’s distribution or rollover terms). However, the statute doesn’t address overpayments for which recoupment is sought but which are not repaid (including overpayments arising from Section 401(a)(17), 415 or 436 failures). The notice clarifies that these amounts don’t get the special SECURE 2.0 treatment. Therefore, in accordance with EPCRS, the plan sponsor must notify the participant that the overpayment is not eligible for tax-favorable rollover treatment. IRS explains that this notice may be combined with the recoupment request.

EPCRS generally requires sponsors to make corrective contributions when fiduciaries don’t recoup an overpayment (with limited exceptions). The notice confirms that these provisions generally no longer apply, now that SECURE 2.0 gives plan sponsors and fiduciaries latitude not to recoup overpayments from participants or other parties. However, corrective contributions may still be required in the following circumstances:

• The overpayment arose because of a failure to implement benefit limitations under Section 415 or 436 or the salary limitation of Section 401(a)(17)
• The overpayment arose in conjunction with an underpayment to a different participant (in this case, the underpayment is the failure requiring the contribution)
• Payment is required prevent or restore an impermissible forfeiture of vested benefits

• Notice 2024-77 (IRS, Oct. 15, 2024)
• Notice 2023-43 (IRS, May 25, 2023)
• Div. T of Pub. L. No. 117-328, the SECURE 2.0 Act of 2022 (Congress, Dec. 29, 2022)
• Rev. Proc. 2021-30, the Employee Plans Compliance Resolution System (IRS, Dec. 3, 2021)

• Correcting retirement plan overpayments under SECURE 2.0 (July 28, 2023)
• The ABCs of IRS FAQs on EPCRS under SECURE 2.0 (June 6, 2023)
• User’s guide to SECURE 2.0 (regularly updated)