plan applied vesting schedule to match in error.

[maverick]

Situation:

- 401(k) Plan with 100% vested match.

- Several years ago the tpa (not me, thank God) administered the plan using an SPD that erroneously stated that the match was subject to vesting. Why they didn't follow the adoption agreement is beyond me.

- For the year in question, the tpa made distributions and forfeited matching dollars to the tune of approx $6,000.

- The forfeited match was used to reduce the next year's matching contribution.Someone stumbled across this during the 5500 audit (large plan).

Okay, what now? I figured the forfeitures need to be "restored" and distributed to everyone who was paid out. Plus make-up interest, of course.

Here's the $64,000 question:

Is this a 4975 prohibited transaction like late submission of 401k deferrals (by using the forf to reduce ER matching contribution, it is deemed that the employer/party in interest took an unauthorized loan from plan assets), thus triggering a "yes" answer to line 4d of Schedule H (did the plan engage in any nonexempt transaction with any party in interet?), Schedule G (Part III), and Form 5330, Part VII [tax on prohibited transaction (Section 4975)]???

Thanks in advance for your learned responses.

[maverick]

Any takers on this one? Thanks.