Pension overpayments / pension recovery
You worked for decades at an employer, retired and began receiving your defined benefit pension from your employer.
You have planned your finances around your pension payments, social security and other sources of retirement savings. Then a letter shows up from the pension administrator. No, it isn’t your monthly check. It isn’t a spare check, either. It’s a letter stating that the plan miscalculated your benefits, they should have paid you less. They need you to pay it back or they will reduce your monthly payments to recover the pension overpayment. This scenario is unfortunately a growing trend in Texas and around the country.
Both private and public pensions struggle under their financing obligations. They are looking at all options to put money in the trust that funds the pension benefits that does not require the employer to put in money out of its own pocket. Instead of recognizing that the retirees have committed themselves to the payments amounts calculated by the employer and usually do not have the money to pay back the overpaid funds and paying the cost of its mistake, employers are callously demanding its retirees pay back the money, plus interest. So let’s talk about what happens when you get these letters.
How the overpayment happen
When you retire from a company and request your pension benefits commence on some date after your retirement, your employer will calculate your benefits based upon the plan’s formula and whatever factors regarding your employment the formula uses to determine benefits. That may include some combination of service years and compensation. The plan administrator, or one of its service vendors, will present you with the estimated payment amounts for all the payment options available. You pick an option, fill out the paperwork, return it and wait for the plan to begin paying your benefits.
Sounds simple, right? Unfortunately, it is not very simple. Depending on your employer’s history and how long you have worked for the company, your benefit may be calculated under several different formulas. You may have decades of employment records that feed into your benefit calculation that have not been kept as well as they should. That leads to a lot of mess, even when the calculation is done right. Add to that pile of disaster that plan administrators often use improper calculations, the wrong interest rates to calculate payments, use wrong data, and find other ways to mess up the calculation. And that is in spite of the large sum of money most plans pay consultants, third party administrators and recordkeepers to help them perform the calculations.
Overpayments and audits
I’m not just dogging on the pension service industry. Before opening The Kielich Law Firm, I worked for Fidelity Investments in a service group that dealt with their 401k plans, defined benefit pensions and executive compensation plans. I saw first hand that the calculations were not always perfect. It wasn’t just Fidelity’s fault. The employer and various consultants the employer hired to assist in the process had their own involvement in erroneous calculations.
Years may go by before the employer or one of its service vendors performs an audit on the plan and locates the overpaid amounts. Now, in all the time I worked for Fidelity I do not recall ever seeing a plan send out a letter because it was under paying a participant-retiree (not to say that never happens). But when the overpayments are located, the plan begins the process of trying to recover payments.
How the plan administrator will recover the overpayment
Typically when an overpayment is caught the plan administrator, or a service vendor, will send out a letter alerting you to the overpaid amount and the corrected monthly payment going forward. Most plans adopt a two option approach: 1. they will ask you to pay the overpaid amount as a lump sum and your corrected payments will continue unaffected; or 2. if you do not repay the lump sum by a set date then the plan will reduce your monthly payment until you satisfy the overpayment. Some plans will even require you to repay the overpayment with interest. Plans prefer to get the lump sum because it’s a tidy conclusion to the problem.
However, plan administrators will take repayment from the monthly payments because they touch that money before you. Their hope is that they get repaid one way or another before the retiree dies. Depending on how long the overpayment went on, there may be an enormous sum required to be repaid.
Discovering options to deal with overpayments
The plan administrator will not tell you about any other options or other more flexible options to recover the repayment because, let’s be honest, the plan administrator works for the employer and the employer just wants to get the money back from you. Employers are aware that you made financial plans based on the amount of the pension benefit. They don’t care that you relied on their calculation to plan the latter years of your life.
They don’t care that you could end up homeless. Plan administrators will tell you that they have no choice but to recover the overpayment, because they have a fiduciary duty to the plan to do so. That is true; they do have a duty to recover the overpayment. They do not have a duty to get it from you. The employer could pay for its mistake.
What to do if you get an overpayment letter
First, contact the plan and ask for information about what was incorrect about the original calculation and obtain as much information as you can about both calculations. It is possible that the latter calculation is wrong. You need to review the employment records to make sure the new calculation is accurate. It would be a good idea to take that information to an actuary to verify the calculation.
If the new calculation is correct then you should contact the plan administrator and ask that the plan waive the overpayment on the basis of the hardship it will cause you. The more detail you can provide about your finances, the more likely you are to sway the plan administrator. Especially if the overpayment is a few thousand dollars. Under ERISA, plan administrators can waive recovery if it would cause the participant-retiree a financial hardship.
If the plan administrator will not waive the overpayment, and it likely will not, then you can also request that the employer share in some or all of the overpayment. Again, an unlikely resolution, but it does not cost anything to ask.
If the plan administrator charges interest on the overpayment, you can request the interest waived. The plan does not have to recover interest. Again, unlikely but worth requesting.
If none of these are viable options then you should work with the plan to set up a payment plan. The plan administrator does not have to work with you; but if you have shown desperation through all of the above requests, you might get better treatment.
If the plan will not work with you
Unfortunately, the plan is going to get that money as much as it can. As brutal and unsympathetic as the result is, it is consistent with any other overpayment made in life. If your bank adds ten thousand dollars to a check you deposited, the bank can get that money back. The law generally does not help you to benefit from the mistakes of others, at least not in that manner. Some retirees have tried to sue to prevent these overpayments but I am unfamiliar with many successful cases. As overpayments become more common we may find a sympathetic court to offer a different conclusion. For now it seems these cases have a low probability of success.
If you have received a pension overpayment letter and want help negotiating with your plan, contact my office.
Photo courtesy of 401k 2012/flickr