Hardship Withdrawal - salary deferrals were not suspended after distribution

[Guest nps]

A participant received a hardship distribution, and the employer did not suspend his deferrals for the next six months. I am hoping for some opinions on the method of correction.

We have looked in the ERISA books and see that it says the deferrals should be forfeited and used to reduce an employer contribution, and the employee should be made whole through payroll. If this is the correction, won't the employee be taxed twice (ex. social security) - on the original payroll and on the reimbursement?

The book seemed to say that you don't want to disburse and issue a 1099-R because there is no appropriate code so that it won't have an early distribution penalty tax. Notes from a prior conference said that the distribution could be coded as a 7, so the 10% penalty would not apply. Does that sound familiar to anyone else?

Thank you!

[Guest mmc]

In the instance that I encountered this problem, we did forfeit the deferrals and had the employer make the participant whole through payroll. The employer balked, but the plan used forfeitures to reduce the match, so the employer was somewhat placated.

The amount was not that significant and the double SS taxation was not even raised as an issue.