SE "owner only" deposits 41K but has no income

[Guest tracys]

An "owner only" client has deposited $41,000 into his 401(k) plan during 2002 and will now be showing a net earned LOSS on Schedule C. How is this handled? If we call it a "participant-level" 415 violation, document calls for deferrals to be returned and ps portion to be put into a suspense account (which is not distributable, of course). At the same time, if we call it an "employer-level" 404 deductible limit violation, we could return all of it by the due date of the tax return and not pay a penalty. Which comes first? - the 415 suspense account - or the 404 refund of non-deductible? I'm inclined to think that 415 comes first - it goes into suspense and the client pays a non-deductible penalty. I would greatly appreciate any input.

I also question whether the first 12K can even be categorized as deferrals in the first place (previously posted) but I would at least like to know how the ps portion should be dealt with.