Excess Distributions

[Guest Thornton]

We administer a plan where the plan sponsor has been over reporting hours for the last five years. Many participants who did not work 1,000 hours were reported as doing so, and incorrectly given a year of vesting service. About 30 former participants are involved with total overpayments of approximately $8,000. Total plan assets exceed $1,000,000, so no single participant is significantly impacted.

What is the proper correction method? Is the plan sponsor required to attempt collection of small sums of money from the overpaid former participants, even if they could be found? If the sponsor elects to deposit the overpaid amounts, is the contribution deductible? Would earnings need to be paid on the deposited amounts? Would all prior years with excess distributions need to be reallocated? The problem has been corrected for the past year. Can the sponsor simple ignore the excess payments? Thanks.