Hardship distribution made in error

[Guest David M]

Our service provider issued a hardship distribution in error from our 401(k) plan. The dollar amount was less than $10,000, and taxes were withheld. The proposed solution is for us to write a letter to the individual requesting return of the funds. The letter will inform the individual that he will need to pay the penalty for early distribution as well as the usual tax if he is unable to return the funds. We do not expect the individual to be able to return the funds.

In addition to the letter to the participant, we are receiving from the service provider a document describing the results of research as to why this mistake occurred and and providing procedures that are being put in place to insure that this mistake does not occur again.

Is this the common practice in the industry?

[2muchstress]

What exactly was the error? Did the partcipant not provide sufficient data to evidence a hardship? Or does the plan not allow hardships? Depending on the error, the correction may be different.

Does the plan allow for in-service distributions? If the participant does not repay the money, and the plan does not allow for in-service distributions, then there may be other operational failures.