Section 301(b) of Division T of the SECURE 2.0 Act added provisions to the Internal Revenue Code (IRC) to address the requirements of inadvertent overpayments and their treatment as eligible rollover distributions. The Internal Revenue Service (IRS) issued Notice 2024-77 on October 15, 2024, providing important guidance and clarification on treating inadvertent benefits overpayments. The Notice also contains guidance on how to make contributions to remedy the overpayments.
Generally, Notice 2024-77 makes it easier for plan sponsors to correct inadvertent overpayments. Employers are not required to make corrective contributions for overpayments in many circumstances in which they previously were required to do so. The Notice also modifies various other aspects of Rev. Proc. 2021-30, such as provisions relating to excise taxes, income taxes, and notifications to individuals.
The Department of the Treasury and the IRS are accepting public comments on the Notice through December 16, 2024.
Defining an Inadvertent Benefits Overpayment
An inadvertent benefits overpayment for the purposes of Notice 2024-77 is “a payment made from a plan that exceeded the amount payable under the terms of the plan or a limitation provided in the IRC or Treasury regulations.” The payment falls into one of the following categories:
- A payment described in section 401(a), which includes a trust exempt from tax under IRC Section 501(a);
- An annuity plan described in IRC Section 403(a);
- A plan established for its employees by the United States, by a state or political subdivision, or any agency or instrumentality; or
- An annuity contract described in IRC Section 403(b).
Furthermore, inadvertent payments include payments made before the plan terms, or the IRC permits a distribution from the plan.
Corrective Payments
Corrective payments are typically not a requirement of an inadvertent overpayment. The failure to obtain a corrective payment does not constitute a violation of IRC Sections 401(a) and 403.
However, other failures may occur due to an inadvertent overpayment, which may necessitate a corrective payment in some circumstances. For example, suppose a failure under IRC Section 436 occurs because of an inadvertent overpayment and no recoupment occurs. In that case, the plan sponsor or another person must make a corrective payment under Rev. Proc. 2021–30 as if the overpayment was not inadvertent. Accordingly, an amendment to increase past benefits under IRC Section 414(a)(1)(B) is permissible if the plan sponsor or another person makes contributions, according to Rev. Proc. 2021-30.
A plan also may self-correct inadvertent overpayments if it meets certain requirements. The plan sponsor may not use a correction method forbidden under Rev. Proc. 2021-30. The plan sponsor also may not amend the plan in a way that violates IRC Section 401(a)(17) or 415 for the past year.
Recoupment and Rollovers
While a plan may seek a recoupment of the inadvertent overpayment, a plan is not required to do so.
An individual who receives an inadvertent overpayment and rolls it over under a direct or 60-day rollover keeps the tax-favored status for the portion of the payment for which the plan has not sought recoupment. However, the portion of the plan for which the plan has sought recoupment and is not returned to the plan is not an eligible rollover distribution.
HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and H.R./employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.
Hall Benefits Law, LLC
Latest posts by Hall Benefits Law, LLC (see all)
- 5th Circuit Upholds Most No Surprises Act Provisions - December 11, 2024
