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The crazy client apparently got bored with the discussion and went ahead and filed as an amended return, so I guess there won't be much to report back on. I'm sure the opportunity will come up again though!

It is a question of "what wold a "prudent expert" do in similar situations." That, in my mind requires an analysis of the costs and benefits of having a procedure that - by definition - would create errors, but also would keep costs low. I think the fiduciary would lose. The "cost" of the plan sponsor/fiduciary performing their duties correctly is never a consideration in determining whether the action was appropriate. Only costs to the plan would be an appropriate consideration. Per the OP's original situation, the "costs" to the fiduciary of actually being a prudent "expert" was nil. "RTFD" - in this case, "read the ... document" and make a decision (apply your best fiduciary judgment) Takes some time, but no costs.

I think some clarification may be in order--I read this as Participant DID receive hardship even though he shouldn't have, then is coming back with a complaint to the PA for not denying it. In any case, I can't see the Participant getting any traction with this. PA should revise procedures though.

I think the participant is out of luck. A "hardship" existed at the point in time of it's request/payment. The tax consequences affixed at the time of distribution (and that wold be true even if "distributed" to escrow). I know of no way to "reverse" a hardship distribution. Timing is everything - perhaps a word of caution - delay the distribution until everything is set to close, then pay to have the funds wired.

No I haven't seen it in practice, and there really is no reason for a 5558 filing to trigger an audit. A 5500 filing that indicates that the plan should have had past filings will probably trigger a response asking why prior years were not filed. I see no benefit in filing anything for the current year until you have the past years ready to file (or already filed) with the proper correction.

EPCRS (Rev. Proc. 2016-51) lays down the law in Section 4.01(1) that self-correction is not available for plan document failures, which is what this is. So you must do a VCP submission.

It would seem that this would be one of the rare instances where you could take the money back under ERISA's mistake of fact rule, but it will be SOOOOO much easier and cheaper to just suspense it and short the next employer check into the plan by that amount.

"Learn"? What is this "learn" you speak about? I expect to pick the brains of those who know, so I don't have to! Beside, too many "baseball promotions" have resulted in a diminished capacity to learn!