hardship withdrawal

[Guest Janet]

A participant took a hardship withdrawal. The employer should have suspended his 401(k) contributions for a period of 12 months. However, during this tenure (minus a month or so), the participant continued to defer compensation and received matching contributions from the employer. What are the tax ramifications? How do I correct this?

Thanks!

[Guest ERead]

Wow - I'm not sure if there would be tax consequences to the participant. I would think that the language of the document has been violated and you should go through some sort of self correction, or correction program.... anyone else?

[david shipp]

The following is from the Reish & Luftman Q&A for Plan Defects found elsewhere on this site:

"ANSWER 21: The IRS permits two forms of correction in this situation:

The preferred method is for the plan to return the deferral amounts which should not have been made, plus earnings. Further, the participant must be prevented from deferring any additional amounts for the remainder of the 12-month "deferral lockout" period (if that period has not already expired).

An alternative is to leave the mistaken deferrals in the plan and simply prohibit the participant from deferring for a 12-month period going forward. The IRS does not favor this form of correction and will require a compelling reason to permit the plan to use it. "

Option 1 would also entail the forfeiture of matching contributions.

It would appear that 1099 reporting would follow the approach of returning a 402(g) exess.