Repayment of impermissible hardship withdrawal

[dcoderre]

A correction offered in the IRS "fix-it-guide" for an impermissible hardship is for the participant to repay the hardship amount plus earnings, consistent with SCP under Rev Proc 2008-50. For a hardship taken in 2010 and repaid in 2011, I am wondering how to tax report. The 2010 1099-R (already issued to participant) reflects the amount of the hardship withdrawal. Rev Rul 2002-84 (issue #3) leads me to conclude the amount is supposed to be taxed in 2010, and then the participant might be able to take a deduction for the repayment in 2011; the repayment would not create a tax basis in the 401k account.

The participant is unhappy with this tax result. The participant wants to pay back the hardship in 2011, but wants the 2010 Form 1099-R amended to reflect a $0 distribution. The participant is under age 59-1/2, and does not want to pay the early withdrawal penalty nor 2010 income taxes on the withdrawal.

The plan would like to correct under SCP assuming it is eligible, though I think if an early withdrawal penalty applies, the only way to request waiver of early withdrawal penalty would be under VCP.

Can anyone point me to some guidance that would allow us to amend the 2010 Form 1099-R to $0 when the SCP repayment correction is done in a later tax year? Thank you in advance.