Overpayment on Distribution...

[Guest algeis]

We have a balance forward, pooled account plan; an employee took a hardship distribution in April 2010; she then terminated employment in November 2010, when her termination distribution was processed the processor who prepared the paperwork; indicated to cashout her entire account balance, she forgot to minus out the hardship distribution that took place earlier in the year so she was over paid by $2000(the amount of the hardship). 2008-50 states that the overpayment plus interest must be repaid to the plan. My question is that if the terminated employee does not have the means to repay, we can push back on the sponsor to pay back the $2000 plus interest which will go into an unallocated account. It's safe harbor so he can use the $2000 towards the 2011 safe harbor which will be made sometime mid 2012. This same participant is due a safe harbor contribution for 2010, which must be funded by 9/15 (on extension). In speaking with co-workers; one feels that if she cannot pay back the $2000 she should not receive the 2010 SH contribution. Or make the 2010 safe harbor to the plan, but not pay her out and forfeit that. I don't think this is an option, the contribution still must be made to her and she is entitled to the additional distribution ?

Thanks!