Free Enterprise - The FindLaw Small Business Law Blog

What Do You Do When You Overpay Former Employees?

Under a program that began in 1991, Milwaukee County employees were allowed to "buyback" seasonal or part-time employment that otherwise would not have been eligible for pension benefits and convert it into pension-worthy time. According to the Milwaukee Journal Sentinel, around 350 workers paid a total of $2.5 million to buy back non-pension time, turning that small investment into at least $50 million in additional pension benefits due from the county.

One of those workers, former Milwaukee County Parks Director Susan Baldwin, paid $683 in 2000 to convert a brief seven-week stint as a county employee in the register of deeds office back in 1969. That buyback netted her $223,209 in alleged overpayments that the Milwaukee County Pension Board is now, thus far unsuccessfully, trying to claw back.

Pension and retirement plan overpayment is apparently quite common. So how do you avoid it, and what do you do if you already overpaid a former employee?

An Ounce of Prevention

Most pension, 401(k), or other retirement plan overpayments are the result of clerical errors. Overpayment to almost 600 Sheet Metal Workers Union members was blamed on "accidental and inadvertent" pension calculations made by prior pension fund employees and discovered in an audit. (The pension fund was demanding repayment of benefits, along with interest from union members in 2013.) Employers have also been known to make mistakes on 401(k) contributions as well.

Of course, the first step is to avoid retirement plan errors, by either having your internal HR and payroll departments cross their i's and dot their t's, or hiring competent pension plan providers if you're outsourcing retirement benefits.

A Pound of Cure

You can always try and recoup the overpayments, either through lump sum payments from overpaid employees, or reductions in their future payments to cover the costs. Note: this will not make you very popular (especially if it was your own error that led to the overpayment of benefits). And, according to the IRS, pension plans are not required to recoup overpayments from former employees.

Instead, if retirement plan administration errors have been made over lengthy periods of time, and the beneficiaries, particularly older individuals, may have financial difficulty making repayments, employers or other persons can contribute the amount of the overpayment (with appropriate interest) to the plan.

As an employer, you want to offer your employees the best benefits, but at the same time, you want those benefits paid accurately. If you discover you've overpaid your former employees, contact an experienced employment attorney to discuss your options.

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