Inclusion of Employee in Wrong Plan

[Guest Jay G]

Hello. I have a problem that is similar to an inclusion of an ineligble employee. We have two plans, each of which providees benefits for a different group of employees. Both plans are defined contribution pension plans for a public school. Two employees were mistakenly included in Plan A when they should have been included in Plan B. We are going to transfer the employees benefits from Plan A to Plan B, but must refund some excess benefits. Does anyone know what the tax effect of the transfer will be? Will the employee have income and if so, in what year (the mistake covers three plan years)? What penalty, if any, do we (the employer) have to pay?