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Due to the use of an incorrect definition of compensation it was determined in late 2016 that several plan participants had made excess contributions to the plan during the 2015 and 2016 plan years. Participants were making salary deferrals on types of compensation that were not eligible compensation under the plan document (i.e commission). A distribution from the plan is the appropriate way to correct for such excess contributions. But would it also be permissible for to refund the excess contributions (adjusted for earnings) to the employees through payroll, particularly if the correction was being made within the same plan year as the error? i.e. If an employee had $100 in excess contributions in 2016, could the $100 plus earnings be returned to the employee as taxable income in the 12/31/2016 paycheck? What about an excess amount from the prior year (2015)?
