Loan Check Issued in Excess of Plan's Limit of Maximum Number of Loans Outstanding

[Guest rocnrols2]

Plan X is a 401(k) plan that permits participants to have two outstanding loans at any time, either two general purpose loans or one general purpose loan and one principal residence loan. Participant A had a loan outstanding and requested a new loan. The Plan accidentally issued two checks and Participant A negotiated both. How should the Plan correct this? If the Plan were to treat this as a distribution, there is a prohibition on in-service withdrawals of 401(k) contributions that are not as a result of a hardship withdrawal. Does this pose a problem? If not, then I think Plan X could ask Participant A to return the amount of the extra check plus earnings or be informed that the amount of the extra check could not be rolled over and issue a 1099-R. Having Plan X pay the amount of the third loan back into the plan would be a windfall to A. Any thoughts?

[QDROphile]

Does the combined amount of the two checks exceed loan limits? If not, are you willing to treat the two checks as disbursement of proceeds of one loan (twice as big as initially requested, but evidently a size that the particpant wants)?