How to correct improper hardship distributions - a wrinkle not previou

[JDuns]

A plan allows hardship distributions of employee money only. A new TPA inadvertantly lets a few employees receive hardship distributions from both employer and employee money.

(1) To correct this I understand that the plan can either (a) use walk-in cap and retroactively amend the plan to allow the withdrawals (the er doesn't like this option) or (B) collect the distribution from the employee. Are there other options that have been blessed by the IRS?

(2) If the employee won't or can't pay, must the employer recontribute the distribution to the employee's account --giving the employee a windfall?

(3) Finally, if the plan actually allowed hardship withdrawals from both er and ee money, wouldn't the employer be obligated to withhold 20% on the er money (unless it was rolled over) and 10% of the ee $ since 401(k) deferrals are not rollover eligible (unless the employee returned a form W-4P).

Thank you for your help!

[Guest]

check out Q & A 46 and 47 under correction of plan defects for a discussion on hardships, and possible suggestions.

[JDuns]

I had seen the referenced Q&As. I was concerned that Appendix B to Rev Proc 2000-16 (correction methods) provides 2 alternatives that would appear to apply in this situation: correction of other overpayment failures (2.05) or hardship distribution failures (2.07(2)).

While it appears that the IRS histroically has accepted as appropriate correction an unsuccessful attempt to collect without making up the difference if the employee refuses to return the distribution (so long as a spouse's rights are not impacted), I was unsure if this analysis is still valid in light of the new rev proc. Thank you again for your help.