On October 15, 2024, the U.S. Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) released Notice 2024-77 providing interim guidance on Section 301(b) of the SECURE 2.0 Act of 2022 (SECURE 2.0) regarding inadvertent benefit overpayments from certain employer-sponsored retirement plans, including qualified defined benefit (DB) and defined contribution (DC) plans, and 403(b) plans, and the treatment of certain inadvertent benefit overpayments as eligible rollover distributions. The notice also discusses the impact of these SECURE 2.0 changes on the Employee Plans Compliance Resolution System (EPCRS) currently set forth in Revenue Procedure 2021-30 relative to the correction of inadvertent benefit overpayments. EPCRS is a system of IRS correction programs used by employer-sponsored retirement plans to correct plan errors, including plan document and operational errors.

Section 305 of SECURE 2.0 directs the Secretary of the Treasury (or its delegate) to revise the current EPCRS, Revenue Procedure 2021-30 (2021 EPCRS), and issue an updated version by December 29, 2024, which is expected to incorporate the guidance in this notice.

Notice 2024-77 does not provide guidance on the SECURE 2.0 Section 301(a)¹ changes to ERISA regarding inadvertent benefit overpayments because such ERISA matters fall under the jurisdiction of the U.S. Department of Labor.

Eight key points regarding inadvertent benefit overpayments

The notice is in question-and-answer (Q&A) format. The key points below summarize the answers, though follow the same Q&A numbering format for reference, with the following key takeaways:

Q&A-1: An “inadvertent benefit overpayment” is an eligible inadvertent failure² due to a payment made from qualified DB and DC plans and 403(b) plans that exceeded the amount payable under either the terms of the plan or an IRS limit, or a payment made before the time a distribution is permitted under the qualified plan rules or under the terms of the plan.

Q&A-2: The changes made by SECURE 2.0 enable a plan to not seek repayment of an inadvertent benefit overpayment without risking the plan’s ability to satisfy the plan qualification requirements. Consequently, the 2021 EPCRS requirement for a corrective repayment to be made to the plan no longer applies (unless an exception described in Q&A-5 or Q&A-6 applies). Although a corrective repayment of an inadvertent benefit overpayment is generally not required, other plan failures that may occur in connection with an inadvertent benefit overpayment might require correction. The notice gives an example of a plan participant who received an inadvertent benefit overpayment due to an incorrect allocation of a profit-sharing contribution, which then caused an additional failure of another plan participant receiving a benefit underpayment. In a case like this, a corrective payment would need to be made to the participant who received the benefit underpayment, and the employer may also be required to make a corrective payment to the plan to prevent or restore an impermissible forfeiture.

Q&A-3: While seeking repayment of any inadvertent benefit overpayment is no longer required, it is still permitted (continuing the ability to do so under EPCRS unchanged). A plan sponsor may continue to use the current 2021 EPCRS overpayment correction methods. Specifically,

• DB plans may continue to use the return of overpayment correction method (including repayment through an installment agreement) or the adjustment of future payments correction method, and DB plan sponsors may permit the overpayment recipient to choose between available repayment methods, either a single-sum repayment, agreed-upon installments, or a reduction to future benefit payments.
• DC plans may also continue to use the return of overpayment correction method (including repayment through an installment agreement), and DC plan sponsors may permit the overpayment recipient to choose between available repayment methods.

As noted above, this notice does not address ERISA Section 206(h), which, in part, imposes conditions on recoupment of an inadvertent benefit overpayment from a participant or beneficiary.

Q&A-4: An individual who rolls over an inadvertent benefit overpayment to another eligible retirement plan may, in certain circumstances, retain the overpayment’s tax-favored status.

Rollover treatment if recoupment of overpayment is not sought. For any portion of an inadvertent benefit overpayment that was rolled over in either a direct rollover or a 60-day rollover, if recoupment of such overpayment is not pursued, the amount rolled over is treated as an eligible rollover distribution if the payment would have been an eligible rollover distribution had it not been an overpayment, allowing the individual to retain the tax-favored status of that amount.

Rollover treatment if recoupment of overpayment is sought and returned. Any portion of an inadvertent benefit payment that was rolled over to another eligible retirement plan (the “second plan”) that is sought and returned to the originating plan is treated as an eligible rollover distribution by both the originating plan (when the original rollover was made to the second plan) and the second plan (when the recouped amount is returned to the originating plan). In this situation, both plans are treated as allowing the return as an eligible rollover distribution, regardless of whether the terms of the plan(s) otherwise permit this treatment.

Rollover treatment if recoupment of overpayment is sought, but not returned. If any portion of an inadvertent benefit overpayment is not returned to the originating plan when recoupment is sought, that amount is not treated as an eligible rollover distribution. Continuing to follow the current 2021 EPCRS procedure, the plan sponsor is required to notify the individual that any portion of the inadvertent benefit overpayment that is not returned to the originating plan is not eligible for favorable tax treatment accorded to distributions from an eligible retirement plan (and, specifically, is not eligible for tax-free rollover). This tax treatment notification to the individual may be combined with the plan sponsor’s request for return of the overpayment.

Q&A-5: For single-employer DB plans subject to the funding-based benefit restrictions under Internal Revenue Code (IRC) Section 436,³ the failure to observe any of these restrictions is referred to as a “Section 436 failure.” If a DB plan has a Section 436 failure due to an inadvertent benefit overpayment, to the extent the plan does not recoup such overpayment from the individual, the plan sponsor (or another party) must make a corrective payment to the plan, generally following the correction principles under the current 2021 EPCRS for an overpayment that is not an inadvertent benefit overpayment. This is an exception to the rule described in Q&A-2 above that the current 2021 EPCRS no longer requires a corrective payment be made to a plan in the event of an inadvertent benefit overpayment. However, the rules described in Q&A-4 (relating to rollover treatment if an inadvertent benefit overpayment either is, or is not, sought) would apply if an individual rolled over an inadvertent benefit overpayment resulting from a Section 436 failure.

Q&A-6: Plans must comply with the limits under IRC Sections 401(a)(17) (the compensation limit) and 415 (for DB plans, the limit on annual benefit payments; for DC plans, the limit on annual additions) and may recoup amounts paid in excess of those limits using any IRS-approved method. This requirement is an exception to the rule described in Q&A-2 above that the current 2021 EPCRS no longer requires a corrective payment be made to a plan in the event of an inadvertent benefit overpayment. Thus, if the limitations of IRC Section 401(a)(17) or 415 are exceeded due to an inadvertent benefit overpayment, and if the plan does not recoup the inadvertent benefit overpayment, the plan sponsor (or another party) must make a corrective payment to the plan, generally following the correction principles under the current 2021 EPCRS for an overpayment that is not an inadvertent benefit overpayment.

Inadvertent benefit overpayments occurring because of a failure to observe IRC Section 401(a)(17) or 415 limits are always treated as if recoupment is sought. This means if such an inadvertent benefit overpayment that was rolled over is not returned, it is not treated as an eligible rollover distribution, and following current 2021 EPCRS procedure, the plan sponsor must notify the individual that any portion not returned to the plan is not eligible for favorable tax treatment (and, specifically, is not eligible for tax-free rollover). This tax treatment notification to the individual may be combined with the plan sponsor’s request for return of the overpayment.

Q&A-7: A plan sponsor may not amend a plan to increase past benefit payments to affected participants and beneficiaries, in order to adjust for inadvertent benefit overpayments in a way that would result in a violation for a past year of IRC Section 401(a)(17) or 415 limitations. Such an amendment resulting in IRC Section 436 funding-based benefit restrictions will only be permissible if appropriate contributions are made. Under the current 2021 EPCRS, a correction method should not violate another plan qualification requirement (or a parallel ERISA requirement in the case of ERISA-covered plans). Accordingly, a plan amendment to increase past benefit payments to correct prior inadvertent benefit overpayments is not allowed if it would result in a violation of IRC Sections 401(a)(17) or 415 for a past year. Further, such an amendment is generally not allowed if it results in a Section 436 failure, unless the plan sponsor makes an additional contribution to the plan in an amount necessary to raise the plan’s adjusted funding target attainment percentage (AFTAP) to the threshold needed to avoid imposition of the benefit restrictions.

Q&A-8: Several provisions of the current 2021 EPCRS are modified or will no longer apply due to the changes made by Section 301(b) of SECURE 2.0 regarding inadvertent benefit overpayments and the treatment of certain inadvertent benefit overpayments as eligible rollover distributions. In this regard, the notice lists the following provisions of the current 2021 EPCRS that are modified or no longer apply:

• The definition of an overpayment is modified by Q&A-1 of this notice for an overpayment that is an inadvertent benefit overpayment.
• Any requirement that a plan sponsor notify an individual that an overpayment is not an eligible rollover distribution no longer applies to the portion of an inadvertent benefit overpayment not sought for recoupment (other than as specified in Q&A-4, Q&A-5, and Q&A-6 when recoupment is sought but not returned).
• Any requirement for a corrective payment to be made no longer applies to an inadvertent benefit overpayment, other than as specified in Q&A-5 of this notice relating to a Section 436 failure and in Q&A-6 of this notice relating to violations of the IRC Sections 401(a)(17) or 415 limits.
• As part of a Voluntary Correction Program (VCP) submission, the request for relief from the excise tax under IRC Section 4973, generally relating to excess contributions made to the recipient’s 403(b) plan or IRA, is no longer necessary for any inadvertent benefit overpayment that is treated as an eligible rollover distribution. So, in those circumstances, the need for that excise tax relief no longer applies.
• As part of a VCP submission, the request for relief from the 10% additional income tax under IRC Section 72(t) is no longer necessary for any inadvertent benefit overpayment that is treated as an eligible rollover distribution. So, in those circumstances, the need for that additional income tax relief no longer applies.

Applicability date

The interim guidance provided in Notice 2024-77 applies on the date it was issued. For periods before the date this notice was issued, reliance on a good faith, reasonable interpretation of the changes covered by this notice is permitted. A plan sponsor that interpreted the changes during periods before the date this notice was issued in a manner that is consistent with the guidance in this notice will be treated as having operated under a good faith, reasonable interpretation. The changes in the treatment of certain inadvertent benefit overpayments as eligible rollover distributions applies as of December 29, 2022 (the enactment date of SECURE 2.0), regardless of when an inadvertent benefit overpayment was made.

The Treasury and the IRS invite comments on the guidance in this notice or any other aspect related to Sections 301(b), (c), and (d) of SECURE 2.0. Comments must be submitted before December 16, 2024.

Please contact your Milliman consultant with any questions.

¹ ERISA Section 206(h) as added by Section 301(a) of SECURE 2.0 affords protection to plan fiduciaries who choose not to recoup inadvertent plan overpayments to plan participants or beneficiaries, but does not provide relief from the employer’s ERISA funding obligations in the case of a DB plan, or the requirement to prevent or restore an impermissible forfeiture in the case of a DC plan. In addition, plan fiduciary protection is available if recoupment of plan overpayments is sought from plan participants and beneficiaries, subject to certain restrictions, which are covered in our earlier article: Milliman Client Action Bulletin 31 May 2023.

² Under section 305(e) of SECURE 2.0, an “eligible inadvertent failure” is a failure that (1) occurs despite the existence of established practices and procedures (formal or informal) that are reasonably designed to promote and facilitate the plan’s overall compliance with the applicable Internal Revenue Code requirements, (2) is not egregious, (3) does not relate to the diversion or misuse of plan assets, and (4) is not directly or indirectly related to an abusive tax avoidance transaction.

³ IRC 436 restrictions apply if the plan’s AFTAP is less than 80%.