Non-Employee rollover into 401k plan.

A sponsor and a job applicant were 99% sure the applicant would become an employee of the sponsor.   While final negotiations was taking some time, the applicant rolled in money from a prior company to this sponsor's 401k plan, this sponsor signed approval of the roll-in, and the roll-in was completed, and an account holding assets was created for a non-employee roll-in to this plan.  Then the negotiations fell apart without the applicant ever becoming an employee (though in this case, the applicant may still become an employee in the next 6-12 months).  

I've no background on this to even know where to begin asking questions, but here goes.......

Is this a violation of ERISA type rules?   

Is it an automatic violation of plan document design? 

What type of penalties exist? 

Must the plan disgorge the assets back to "never-employee" immediately? 

Does the "never employee" now have rights as a current plan participant? 

Can they just treat this "never-employee" account balance as a terminated employee? 

Does it have any impact on testing?   

Would it impact the count for plan audit status? 

Any thoughts on how to address this are appreciated. 

Thank you.

Keith

Unless you really want to make a big deal out if it, I think I would consider it a rollover while the guy was employed, and then he terminated. It doesn't impact testing and it does count as an account.

Wouldn't you it think might not count as an account towards the audit threshold, if the guy is deemed to be only a "limited participant" as someone making a rollover before the regular eligibility kicks in?

And hey, if the plan has forceout language which disregards rollover balances, easy enough to get him right back out, too.

3 hours ago, Bri said:

Wouldn't you it think might not count as an account towards the audit threshold, if the guy is deemed to be only a "limited participant" as someone making a rollover before the regular eligibility kicks in?

And hey, if the plan has forceout language which disregards rollover balances, easy enough to get him right back out, too.

Good point on the first comment; although we don't know what actual eligibility is and he might be (have been) eligible if we assume he was in fact hired. I guess I would hope this one account would not tip the scales.

And the second point might work, with the "if" you note. 

Thank you for your ideas and comments above!!!