Recharacterize excess contributions as matching contributions?

[Guest RMM]

A plan discovered recently it failed ADP test in 1997. HCEs are entitled to refunds and earnings. Some of these HCEs took distributions and rolled over into an IRA. Therefore, they rolled over ineligible amounts. These should be subject to excise taxes, etc.

It was discovered also that the plan failed to make matching contributions. The amount of the failed match exceeds the amount of the refunds due.

Rather than notify participants that the initial rollovers were partially ineligible and issue new 1099-Rs, etc. The plan would like to recharacterize the amounts rolled over as really a rollover of the failed matches. Thereby saving the HCEs and the plan the headache. Then the failed match money (in a separate account) distributed now would be considered distribution of the excess from the ADP failure.

I think this is a risky position to take. Sure, money is fungible, but there is no authority for a recharacterization like this. But, what is the downside if its wrong? Anyone see anything beyond having to go back and fix the error? Extra Penalties, etc.? Thanks.