Failure to stop deducting 401(k) deferrals

An employee submitted an election to stop making 401(k) contributions shortly before her hardship distribution. Payroll continued to withhold the 401(k) and did stop it until about 2 months later.

How does one correct this?

This happened during 2016 tax year

thanks

Lexy

The IRS mentions the following. Did the suspension period, which started 2 months late, then last for 6 months? If so, seems like option 1 has probably been satisfied, barring some tweaking if there were changes, as mentioned below in option 1.

3. Failing to suspend participant salary deferrals

If your plan terms require an employee to be suspended from contributing to the plan making the distribution and all other employer plans for at least six months after receiving a hardship distribution, then your plan must suspend salary deferrals. If your plan fails to do this, here are some correction options:

Option 1 - Suspend the employee from making salary deferrals for a six month period going forward. However, this may not put the participant in the same position as they would’ve been if you suspended their contributions immediately after receiving the hardship distribution. For example, the plan’s matching contribution levels for the six month period going forward could be different than what they were during the correct suspension period.

Option 2- Return the hardship distribution. The employee could return the hardship distribution (adjusted for earnings) to the plan. This could put the employee in the same position she would’ve been in had the failure not occurred. This approach may not be a viable solution because the affected employee may not have sufficient resources to repay a hardship distribution. Note, the plan sponsor can’t address a failure to suspend salary deferrals by simply revising administrative procedures going forward because this option wouldn't correct the failure to suspend elective deferrals in the past.