Mid-Year Correction of Improperly Categorized HCE

[Guest rocnrols2]

Plan X has a percentage limit on 401(k) contributions. There is a lower percentage limit on 401(k) contributions by highly compensated employees. Plan X typically monitors the percentage limits on a payroll-by-payroll basis. For 2004, the sponsor determined that a number of participants were non highly compensated and allowed them to contribute up to the higher percentage limit. However, it has since determined that certain elements of compensation were not properly included in making the HCE determination and that these people are in fact HCEs. How should it correct this a) limit deferrals by these HCEs prospectively so that the annual deferral percentage does not exceed the plan limitt? b) limit future deferrals to the HCE percentage limit and refund past deferals in excess of the HCE percentage limit?