Incorrect 401k contribution - mistake of fact

A 401k plan excludes a certain group of employees. The employer mistakenly submitted a contribution to the plan in the amount of $500 for an employee who is not eligible for the plan. It was deemed a mistake of fact, and the $500 was sent back to the employer. But there are about $40 in earnings. I understand that the IRS does not allow those earnings to be sent back to the employer. Does anyone know how the earnings should be handled? This employee will never be eligible for the plan. Should these earnings be distributed to the employee even though the EE is not eligible for the plan? Can the earnings be moved to a suspense account and reallocated or used for plan expenses? Thanks for any insight.

The earnings should be paid to the ineligible participant. The sponsor can't benefit from making a mistake, investing the participant's money and keeping the earnings. I didn't look up a cite for that, so consider it just my opinion. 

edit: I also made an assumption that the $500 is an employee deferral. If that is not correct, and this is employer nonelective money, then my answer changes. 

Revenue Ruling 91-4 dealing with the return of a contribution that is a valid mistake of fact says "Earnings attributable to the excess contribution may not be returned to the employer, but losses attributable thereto must reduce the amount to be so returned."

To address the earnings remaining in the plan, consider possibly including the earnings along with other allocations of income to participants, or possibly paying a plan expense.  Do not use it to offset an employer contribution.

I agree.  Put it into the form account for use by all participants