Picture this – you or your spouse or one of your parents have been retired for many years, maybe more than a decade or two, and have been receiving a regular monthly pension check which you expect will be paid for the rest of your life. Whether it’s a small amount that supplements some other income sources, or whether it’s the main source of your retirement income, it’s a piece of your retirement financial security that you have been counting on for years.
One day, out of the blue, you receive a letter from the pension fund telling you that you’ve been receiving the wrong amount all these years. The plan tells you that you have been overpaid by thousands of dollars through no fault of your own, but due to errors the plan made when it calculated your pension amount. The letter goes on to tell you that your pension is being lowered not once, but twice – first, to the correctly-calculated amount, and then by some additional percentage -25% or even more, so that the plan can recover the amounts it overpaid. In addition to that, the letter asks you to pay a large lump sum within a month, because, according to the plan’s actuaries, the plan does not expect to recover all the money it overpaid you before you die!
This nightmare scenario is, unfortunately, becoming more and more common, and has prompted numerous calls to us in the past few months. One large pension fund in Illinois, for example, recently sent out letters like this to over 500 retirees, asking for repayments in the tens of thousands from individual retirees who the plan claims were paid the wrong benefits for decades. The Illinois Pension Assistance Project is currently helping a number of these people. We are asserting that the plan’s recovery efforts are inequitable due to the fact that none of these retirees were at fault , that the overpayments were completely the result of the plan’s errors and failure to corrects its own errors for so many years, and that the plan’s recovery efforts would create severe financial hardship for these retirees.
Plans justify these recoupment actions by claiming that the plan has a fiduciary duty to collect overpayments on behalf of all other participants in the plan. Unfortunately, given the state of the law right now, many pension plans feel they can write their own rules when it comes to overpayments. Some plans just lower the benefit amounts with little or no warning to retirees and with no formal process for challenging the plan’s actions. Although a Department of Labor Advisory Opinion specifically authorizes a plan administrator to consider financial hardship to the retiree in these situations, this guidance does not seem to be widely known, and does not set any specific, objective limitations on a plan’s ability to recoup. The only standard it sets is highly subjective , and does not define the type or level of hardship a retiree should show to get relief. There is a body of case law that supports our position that a plan must look at all of the equitable factors before undertaking any recoupment, but this is also subject to interpretation.
In the lack of more clear and definite guidance in this area, plans take widely varying approaches. We have succeeded in getting some plans to waive some or all of the overpaid amounts, but we have also had plans fail to even acknowledge that these issues are subject to formal claims and appeals procedures. Plans and participants would all benefit from having more definitive guidance in this area. Some of the proposals over the years have included time limitations on a plan’s ability to recover overpaid amounts, a requirement that financial hardship to the retiree be considered, along with some definition of financial hardship, a limitation on the monthly amount which can be recouped, and clarification of the procedures by which a retiree can challenge a plan’s recoupment action.
Overpaid benefits present a difficult situation for both plans and participants. Plans need to balance their duties to an individual participant with their duty to all participants, while retirees should not be subjected to unexpected and excessive financial burdens created by a plan’s mistake. While we will continue to strive to help our individual clients with these cases, we see the need for more definitive guidance setting appropriate limits on a plan’s ability to recoup these overpaid amounts.