Excess hardship withdrawal allowed

[Belgarath]

Here's one I've never seen. Participant in a 401(k) requested a hardship withdrawal. TPA incorrectly calculated the allowable hardship, and told them they could take (x) when in fact they were only allowed to take (y), which was a couple of thousand dollars less than (x). By the time the error was discovered, check already cashed, and money spent.

What would be your approach to correcting this? Seems like Rev. Proc. 2003-44, Appendix B, .04 (2)(a)(iii) is appropriate, but I'm wondering if there isn't a simpler method.

I think recovery from the participant is unlikely, since they have no money which was why they took a hardship in the first place. And I'm dubious about the legality of the employer withholding this from pay if participant doesn't agree to it. So if participant can't pay, just code the excess on a separate 1099 as premature distribution, and that's that? It doesn't seem appropriate for the employer or TPA to deposit this into the plan as you would in some situations, since this would result in a windfall to the participant.

Appreciate any thoughts!