How To Correct DB Plan Overpayments (Posted March 8, 2005) Technical Tip 140: The following question and answer were from the IRS Q&A Session at the 2003 ASPPA Annual Conference: An employee retired and began receiving a straight life annual annuity of $36,000 from the employer’s defined benefit plan on January 1, 2000. The defined benefit plan is a qualified plan and does not provide for employee contributions. In December 2002, it was determined that the annual payments for 2000, 2001, and 2002 were overstated by $2,000 per year for three years, and the employee included these amounts in gross income in the years received. a. What are the acceptable methods to correct for the overpayment? b. What are the tax consequences to the employee? Response: Revenue Ruling 2002-84 and Revenue Procedure 2002-47 provides guidance for this situation. Under the relevant correction procedures of the Employee Plans Compliance Resolution System, the erroneous payments can be corrected by recouping the entire excess payments in 2003. Therefore, the participant’s annuity payment for 2003 would be reduced by $6,000, adjusted for interest at the plan’s interest rate. As an alternative, the erroneous payments can be recouped by reducing future payments, beginning in 2003, so that the actuarial present value of the reduction is equal to the accumulated value of the overpayments, increased with interest based on the plan’s interest rate. Only the amounts received by the annuitant, after reduction to reflect the overpayments, are included in the annuitant’s gross income in the taxable year of distribution. View all Tips © 2012 Reish Luftman Reicher & Cohen, a Professional Corporation Important notice: Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner's situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation.