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To fit Paul I’s suggestion about classifying a payment as something other than a contribution: The plan’s administrator might want its lawyer’s advice about whether the amounts to be restored to participant accounts might be a restorative payment. 26 C.F.R. § 1.415(c)-1(b)(2)(ii)(C) https://www.ecfr.gov/current/title-26/part-1/section-1.415(c)-1#p-1.415(c)-1(b)(2)(ii)(C). That classification might fit if the plan’s administrator arguably breached ERISA § 102 or § 404(a)(1) in communicating (or failing to communicate) the plan’s provisions, or arguably breached a fiduciary responsibility in instructing the service provider. A fiduciary’s breach need not be proven or conceded; it is enough that there is “a reasonable risk of liability[.]” If a restorative payment meets the reasonable-risk condition, is allocated to restore the harm that follows from the fiduciary’s arguable breach, and meets further conditions the rule specifies, it is not an annual addition. Thus, it does not count in measuring a § 415(c) limit. Likewise, it might not count in a coverage or nondiscrimination test to the extent that the test looks to annual additions. Because the participant does not control a restorative payment, it should not be treated as an elective deferral, and so should not count for a § 402(g) limit, or for a coverage or nondiscrimination test that looks to elective deferrals. This is not accounting, tax, or legal advice to anyone.

Check your plan document for provisions related to the payment of expenses. If you are using a pre-approved plan, be sure to check the provisions in the Basic Plan Document. It is very common for the BPD to have a provision that the Employer can reimburse the plan for expenses, and the Plan Administrator can determine what is a reasonable and nondiscriminatory approach on how to allocate (credit) the expense to participant accounts. If the plan document supports making a reimbursement, operationally the Plan Administrator should be able to give the recordkeeper a file of amounts by person/source, make a deposit for the total of the amounts, and instruct the recordkeeper to post the amounts so they are categorized as something other than contributions (e.g., income, positive expense amount, adjustment...).

The loan policy should specify if terminated employees can repay loans and on what terms. It should also specify when the loan defaults - typically the grace period is the end of the quarter following a missed payment.

The amount of the loan is deducted from his defined contribution plan account when he requests a distribution. There is no logic in requiring the participant to pay back the loan only to add it back to his account at the time of distribution.

See https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs questions 8 & 9. Very short version: the individual files a 5329 and attaches an explanation.

As far as I know, it's the same as it's ever been...file Form 5329.

That explains it! I so appreciate the help. Watch, after all of this finding out how to do this the client will decide not to (which is fine with me).

If a plan’s governing document is ambiguous, one might remove an ambiguity by amending the document. Might the plan sponsor amend the plan to provide that, if the administrator has not received other instructions, the final distribution is delivered as a rollover to a default IRA?