Violation of successor plan rule

So, employer (A) is purchased in a stock sale by Employer (B), let's say on April 1 (yes, humor intended). Employer A has a 401(k) plan, Employer (B) has a 401(k) plan. Both are calendar year corporations. (A)and (B) become a controlled group as of the date of the purchase. Most of the employees of (A) transfer to (B) as of the date of purchase

Employer A does a plan termination as of November 30 of that same year, and DISTRIBUTES all assets, except to the now employees of (B) who ELECTED to have their funds transferred to (B)'s plan. Others chose to receive a distribution. (I'm going on incomplete information here - all details not yet known).

So when there is an impermissible distribution of deferrals under the Successor plan rule, what's the correction? Anyone gone through VCP and gotten an approval for a correction that doesn't require heroic and "unreasonable" results?

P.S. - I know we've discussed this before - and in a VCP filing where participants rolled to the new plan, we'd probably ask to consider these as "transfers." Or something like that. It's more the participants who rolled it out to an IRA, or took in cash that I'm not sure of.

I've never done it but I think the fix involves VCP with requested return of the ineligible distributions from affected participants.

I'm not sure what happens if you are unable to recover the funds. That is the participant says no I'm not returning it, I already spent it, or something like that. For taxable payments to employees my best guess is the IRS will simply let it go if you make good faith effort to recover, for funds that were rolled over to an IRA they would probably want those treated as ineligible for rollover (unless there was another distributable event) with amended 1099-Rs if the funds are not returned.

Belgarath, I have not had this case, but I vaguely remember someone describing a VCP they did and the IRS was pretty flexible. My guess is that they might not even require that amounts rolled to IRAs be rolled to the successor 401(k), although as Lou S. states, that would be logical. I recommend giving the IRS's new presubmission conference procedure a try.