The IRS recently released interim guidance (Notice 2024-77) in the form of eight questions and answers addressing the requirements of Sections 401(a) and 403 with respect to inadvertent benefit overpayments and the treatment of certain inadvertent benefit overpayments as eligible rollover distributions, under Sections 414(aa) and 402(c)(12).
Notice 2024-77 also provides guidance on the impact of Sections 414(aa) and 402(c)(12) on the Employee Plans Compliance Resolution System (EPCRS), currently set forth in Rev. Proc. 2021-30, including the impact on correction of inadvertent benefit overpayments.
The guidance provided generally includes, but is not limited to, the following:
- An “inadvertent benefit overpayment,” for purposes of Sections 414(aa) and 402(c)(12) and this notice, is an eligible inadvertent failure that occurs due to a payment made from certain plans that exceeded the amount payable under the terms of the plan or a limitation provided in the Code or regulations.
- If a plan participant received an inadvertent benefit overpayment due to an incorrect allocation of a profit-sharing contribution under a plan, another plan participant may have received a benefit underpayment. In this case, the benefit underpayment would be considered an additional failure in need of correction, which may require a corrective payment.
- With respect to a Section 436 failure under a plan that occurs as a result of an inadvertent benefit overpayment to an individual, to the extent the inadvertent benefit overpayment is not recouped on behalf of the plan from the individual, the plan sponsor or another person must make a corrective payment under the same circumstances as apply generally under Rev. Proc. 2021–30 for an overpayment that is not an inadvertent benefit overpayment.
- Certain corrective payments, excise taxes, and the 10% additional tax under Rev. Proc. 2021-30 may no longer apply to any inadvertent benefit overpayment for eligible rollovers.
Notice 2024-77 applies with respect to Sections 414(aa) and 402(c)(12) on the date it is issued. For periods before the date of issuance of this notice, a taxpayer may rely on a good faith, reasonable interpretation of Section 414(aa) and 402(c)(12). A plan sponsor that interpreted Section 414(aa) or 402(c)(12) during periods before the date of issuance of this notice in a manner that accords with this notice will be treated as having applied a good faith, reasonable interpretation of Section 414(aa) or 402(c)(12).
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