ACP Correction After Distribution

I have a former HCE who took a full distribution of his account last year when he retired. This year we found out that we failed ACP test and need to make corrective distributions. Do we need to cut the former HCE another check? Or is this corrected by deeming last year's distribution as the correction?

I'm looking at 1.401(k)-2(b)(2)(v), which says, in part: "If the entire account balance of an HCE is distributed prior to when the plan makes a distribution of excess contributions in accordance with this paragraph (b)(2), the distribution is deemed to have been a corrective distribution of excess contributions (and income) to the extent that a corrective distribution would otherwise have been required."

I think I am hung up on the "to the extent that a corrective distribution would otherwise have been required." Any thoughts about what that language is supposed to mean?

I think that means that the you're okay because the correction amount is part of the overall total.  But that's presuming you're saying this was a taxable cash payment. 

If the HCE did a rollover then the plan has still satisfied the requirement to distribute the corrective excess, but it would result in an ineligible rollover contribution.

Thanks! That's what I was hoping it meant, but wanted to be sure. Yes, this was a taxable distribution (not a rollover), so I don't think I even need to issue a corrected 1099-R, which would be the case if there had been a rollover. 

Is the participant under/over age 59 1/2?

Refunds are not subject to the 10% penalty tax.  So if they are under age 59 1/2 it would be advisable to issue 2 1099-Rs:  one with code '1' and another with code '8'.

Thanks for that detail! If under 591/2, then we would need to do a corrected 1099 backing out the corrective distribution and then also issue a new 1099, with code 8 for the amount of the corrective. 

If separation occurred after age 55 then you also have an exception to the 10% pre-mature distribution tax.