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Rev. Proc. 2013-12 substantially improves the situation for you. See Section 6.06(4). The suggested correction method is to take reasonable steps to have the invalid distribution plus earnings returned to the plan. Also notify the participant that the distribution was ineligible for rollover. However, for impermissible in-service distributions, if the participant does not repay the plan, the employer does NOT have to contribute an amount to rebuild his or her account.

First I think they need to decide do they want a pooled account or participant directed account plan. This mix and match style is going to keep causing these kinds of problems in my mind. Most plan documents have a provision in them that gives the Plan Administrator the ability to make reasonable, non-discriminatory decisions on how the plan is run when the document is unclear or silent on the issue. So I think the administrator can decide what they like as long as it is reasonable and non-discriminatory. For what it is worth I think paying this person or reallocating across all remaining accounts would be reasonable and most likely non-discriminatory. I would advise documenting the decision as you have set a precedent and I would follow it in the future. Lastly, I would figure out now how to handle the loss because it will happen.

I think I would allocate the trailing gain pro-rata among the other participants, based on total balances. I would also re-think handling the investments this way. It sounds pretty awkward to me.

Is someone asking this question because they are under examination by the IRS or someone else with the ability to cause pain? If so I would suggest that the food is fully taxable unless it is provided for legitimate business meetings or can be excluded as a de minimus fringe benefit under IRC Section 132. Is someone asking just because he/she is curious? If so, I would suggest that he/she not be so curious and worry about other matters instead.

Looked it up - chapter 11 part I.3c Sal talks about a situation that excludes a number of things for purposes of deferral (e.g. bonuses) but then that the match must satisfy 414s somewhat the opposite of what is described here the example provided in 3.c.1 says as long as plan must pass compensation ratio percent test for the match no matter what the deferral comp def is. You raise a valid point in regard to rate of match, but my understanding of the rate of match issue is that you can't provide a larger match % on 'more' deferral (e.g. 100% on the first 3% and then 150% on more than 3%, which wouldn't happen in this example. that being said, I personally wouldn't write a formula like that Sal has a big write up 11.B.5 in which, at least in my opinion, the Reader's Digest condensed Version would be: "What are you, out of your mind?"