recordkeeper error allows excess hardship distribution

[K2retire]

Due to a coding error on the part of a recordkeeper, all money types were permitted to be used for hardship withdrawals even though the plan documents called for hardships to come exclusively from pre-tax deferrals. At this point it is uncertain how many plans/participants may have been impacted by this error.

In many cases, the balances were sufficient to support the amounts distributed, so the correction is merely a coding change.

However, there were some instances when the amounts distributed exceeded the amount that was available for hardship distribution under the terms of the plan. Some of those are probably instances where the excess was withdrawn from the safe harbor matching source.

What options do we have to fix those errors?

[Guest Kathy D]

The recordkeeper should have established protocol for dealing with overpayments of this type (whether or not it is their fault). I would pass those by your auditor and plan counsel.

The primary option will probably be to contact the employees who received more money in hardship than allowed in the plan document and seek a return of the funds. Since it was initially a hardship, it may be difficult to obtain a return.

Since I like restitution of lost funds I would then look to the recordkeeper to make the plan whole for any monies we (or they) were unable to recover.

[K2retire]

That was my thinking as well. But how would do you treat the money that is deposited? It's neither a contribution, nor earnings.

(added question) These are individual daily valued accounts. Would the money go back to the participant who got the excess distribution?