bad 415(c) correction - prohibited transaction?

executive exceeded 415(c) and company refunded the $10,000 of excess after-tax contributions through payroll rather than through the plan.

months later, company convinced plan recordkeeper to remove $10,000 from participant's account and send it to the company.

issues abound! there's still a 415(c) issue because the earnings were never distributed from teh participant's account. A 1099-R was never issued (since the amount distributed out of participant's account went to company). Moreover, there's a prohibited transaction here given the transfer of assets from the plan to the company.

Welcome other thoughts, but I think the company should unwind as best as possible by returning funds to the plan (with earnings/interest), moving it to the participant's account, distributing it to the participant as a 415(c) excess, reporting it on 1099-R for current year, and then recouping that amount from the participant outside of the plan (since participant would otherwise have a windfall).

My main concern is with the fiduciary violation. Would this qualify as a below-market interest loan from the plan to the company, such that it could be corrected via VFCP? 

Yikes.  My first comment is that this is a mess.  They need an accountant to unravel all these errors.

• First, the administrator should not have accepted the excess contributions unless provided by the plan document.  This could be a disqualification issue depending on the plan provisions.
• Second, the administrator should have returned the contributions directly to the executive.   The company should not have returned them.  I am afraid they could be construed as an additional payroll payment to the executive
• Third, the administrator could have kept the excess contributions, but the executive could not have deducted them and instead paid the appropriate taxes.  Of course, the plan would have to permit excess contributions.
• Fourth, I am not sure that the earnings should be returned to the company.  I believe they belong to the assets of the plan and should be distributed among plan assets.  I can also see an argument that the earnings on the excess contributions should be distributed to the executive, but taxes withheld.
• There are errors due to actions by the executive, company, and administrator and I don't have the answer as to who gets what when unwinding this mess.  The main goal is to be sure that all participants are not hurt.
• At this point I will revise my advice to they need an accountant AND attorney to unwind this mess.