401k Overcontribution Correction

I have a situation I'm hoping to get some suggestions on. I have a participant who received an erroneous large commission payment in 2017 which was repaid in 2018. 401k deferrals were taken from the erroneous payment, and the amount was such that it caused the participant to reach his 2017 402(g) limit, so no 401k deferrals were taken for the rest of the year. 

Reversing the deferral contribution results in him NOT exceeding the 402(g) limit. In correcting this situation, I assume the company has an obligation to make up what his 401k contributions would have been for the rest of the year? Do you agree that this will be at least at a 50% rate plus match and earnings? Of course he is an HCE - fortunately it shouldn't change the testing results appreciably.

Why not leave the money in the plan and just have him re-pay the full commission?  Did he not have other comp. to support the deferral?

Unless the negative to adjustment to the commission in 2018 is going to result in the issuance of a W-2c for 2017, reducing elective deferrals for 2017 is a non-starter.

Under the laws of many states, including New York, the participant might be able to argue the employer has to file a lawsuit against the participant to collect the previously-paid commission.  I know that is the law in many states for normal wages, and I am guessing those laws pick up the commission.    This also raises issues about the claim of right tax doctrine.  That doctrine is codified in the Internal Revenue Code somewhere, but I forget.  It gets messy.    

ERISAAPPLE, it's in Section 1341 of the Code. Yes. Very messy. Many cases, many shadings.

The employer is actually going to issue a W-2c. The complication here is that employee has now repaid exactly the amount of the check he got, and the employer has reversed the payroll, so it is a bit of a bookkeeping mess. Still, we may have to do some version of ERISAAPPLE's solution to get this fixed.

Thanks!

If you are doing W-2c (I refrain from any judgment as to whether that is correct under the circumstances; will assume it is for rest of this comment), then I think you need to recalculate deferrals and any other contributions for 2017 to what they would have been if the corrected comp amount had been used for all purposes. Then any excess would be refunded to the participant under EPCRS self-correction. If the participant still owes something to the employer, he can use what he receives as refund to continue to repay employer. If he has fully repaid employer, he keeps the refunded amount from the plan.

Under the IRS rules the employer is not supposed to correct income tax withholding errors in later years.   I don't know if that is what you mean by "reverse the payroll," but just in case.