Premature Distributions

[Hoard1]

In the first year of the Plan an Employer allowed two employees to withdraw their 401(k) contributions without hardship paperwork and allowed them to continue to contribute to the plan.

Is this correctable?

What would be the method of correction?

[Richard Anderson]

Looks correctable to me. In general, a correction must put the plan in the same position as if the failure had not occurred. This is what I think the IRS would require as a correction: Ask the participants to return the money to the plan. If they refuse, then the employer has to put the money back into the plan, thus putting each of the participant's accounts back to what it would have been if the distribution had not occurred.

[Richard Anderson]

I just read question 110 of the Q&A for plan defects. It covers exactly this situation. It appears the IRS will allow the hardship paperwork to be filled out with a retroactive effective date, and the employees must be returned the deferrals made during the 12 month period after the hardship distributions, plus earnings.