Refund of Prior Year 401K Deferral

[Guest Amana]

I found out, a couple days ago, that an employee received a hardship withdrawal last year and the HR department failed to suspend the deferrals. The plan administrator inisists that I refund the ineligible prior year deferrals. I asked the plan administrator to refund the employee directly and issue him a 1099R. The administrator said that for this type error, where the deferrals were ineligible, the employer should process the refund. Should I just process the refund, which would mean issuing the employee a corrected W2(I haven't file them with the SSA), filing Form 941X, filing an amended Form 940, or continue to insist the plan administrator process the refund and 1099R?

[masteff]

Why not simply suspend for 6 months now? The IRS says they don't prefer that solution but they have not said you can't use it. The main issue is if it would result in the EE receiving less match than they would have if the suspsension had occurred at the correct time (or if the EE has terminated).

See slides 25-27: http://www.irs.gov/pub/irs-tege/epcrs_plancorrection_phoneforum.pdf

[Guest Amana]

Why not simply suspend for 6 months now? The IRS says they don't prefer that solution but they have not said you can't use it. The main issue is if it would result in the EE receiving less match than they would have if the suspsension had occurred at the correct time (or if the EE has terminated).

See slides 25-27: http://www.irs.gov/pub/irs-tege/epcrs_plancorrection_phoneforum.pdf

Thanks so much your help masteff! I've suggested this to the HR director, and the plan administrator. Neither have gotten back to me as to whether we should/can do this. HR created this mess by not suspending the deferrals and now it has been dumped in my lap (the payroll administrator) to correct. Seems like HR would try to correct this using any option that would cause the least pain on the payroll department, especially this late into year end.

[masteff]

If they reject that solution, then point them to the link above and to page 7 of the 1099-R instructions and tell them that the plan needs to make the correction and report it on 1099-R. http://www.irs.gov/pub/irs-pdf/i1099r.pdf

[Guest Amana]

If they reject that solution, then point them to the link above and to page 7 of the 1099-R instructions and tell them that the plan needs to make the correction and report it on 1099-R. http://www.irs.gov/pub/irs-pdf/i1099r.pdf

Again, thank you very much masteff. I really appreciate your suggestions. I've made this suggestion also. Next week should be very interesting, since I put in an email this afternoon, to HR, the plan administrator, my boss and my boss' boss, why I believe this correction should be made by the plan and not payroll. I've put this back in the lap of HR.

In my email, I also suggested that HR put procedures in place to keep this from happening again. HR refuses to inform payroll of hardship withdrawals, so we only know of them if something goes wrong. I don't know what the big secret is. If they'd tell us when someone receives a hardship withdrawal, we could be on the lookout for an erroneous deduction when we process the payroll check. Maybe since I'm making such a big stink about this, we'll be notified in the future.