Ineligible after-tax contributions

[Guest jim williams]

What is the corrective procedure when a 401k plan sponsor erroneously contributes after-tax employee contributions on behalf of a participant when the plan document does not permit such contributions?

I'm assuming we have to refund the contributions plus gains/losses. Would the participant be taxed on the earnings? Any excise taxes apply?

[Jim Chad]

I can't say I have ever heard of this happening, but my first thought is that you would handle it the same way as when an ineligible employee is allowed to defer. The Plan would forfeit the money, including gains, and make the employee whole outside the Plan. The forfeitures would be used according to the provisions of the Plan document.

Anyone else have any thoughts on this?