Under what circumstances is this allowed? Obviously, people prefer to avoid excess contribution penalties or at least limit them (prevent them from pyramiding), but of course, people prefer most the "no harm, no foul" approach, and it would seem that a reversion or refund of an excess contribution serves as that sort of approach.

Not quite sure what you're getting at, but the IRS has made it clear that refunds of contributions to the employer are only supposed to occur due to a "mistake of fact." What's less clear (or maybe some of us prefer to think of it as not clear because it is somewhat restrictive) is exactly what is a "mistake of fact." I seem to recall the example given is a wrong date of birth, leading to a contribution that is too much, implying a DB situation. I think a conservative approach might extend this to the incorrect inclusion in a plan of an employee where a wrong date of birth or hire was provided, but strictly speaking, this should only apply to a money purchase or fixed match formula (since an optional contribution that is "too much" can simply be reallocated among other participants). Taking this to a logical conclusion, a plan with a fixed match as well as profit sharing that put in "too much" for the match should treat the excess as profit sharing.

A less-conservative position, probably followed by a fair number of TPAs (keeping in mind that anyone can call themselves a TPA), is to simply allow refunds of any money that was later determined to be "too much." The couple of plans I've seen handled by ADP have followed this approach.

Enda80, I think some more facts are needed. For starters, what kind of plan is this?