Exclusive Benefit Violation (Inclusion of Non-Employee)

[Guest EMC]

Any thoughts on a correction method for a plan that has inadvertantly permitted individuals who were not common law employees to participate in the plan? (the plan admin. originally thought the individuals were employees and so let them participate; as it turns out, these individuals were, in fact, independent contractors and not employees).

The plan is a profit sharing plan with a 401(k) salary deferral feature and employer match. Most of the individuals in question have vested account balances.

This seems to be a different problem that inadvertant inclusion of individuals who have not met a plan's age/service requirements. I can think of several corrections for that problem: (1) retro amendment making them eligible (safe harbor self correction), or (2) return of deferrals and forfeiture of other contribs (non-safe harbor, IRS filing).

If these are the options, may deferrals be returned to these individuals and may vested amounts be taken from them even though they, technically, were never eligible to participate in the plan to begin with?