Excess contributions distributed by mistake. How is this corrected?

[Richard Anderson]

We have a takeover plan. The prior TPA determined that the 1999 ADP test failed and instructed the client to distribute the excess contributions; which was done before March 15, 2000.

In reviewing the 1999 ADP test I noticed that two HCEs were incorrectly classified as NHCE. The test actually now passes, since one of these HCEs deferred zero and the other deferred 2.33%.

Since the ADP test actually does not fail, how is this corrected? Do the HCEs return the distributions? If so, then I assume that they would amend their 1999 1040 to reflect the higher deferred amounts. If the distributions are returned, should a 1099 be issued?

Just to complicate this further, two of the eight HCEs that received the distributions are now terminated. How should their situation be handled?

[Guest]

see Q & A 38 - 42 under the corrections of plan defects.

the responses are a few years old, when APRSC was just coming into practice, so take that into consideration.