Rollover before eligible

A 401(k) Plan permits rollovers for participants only. A recordkeeper permitted an employee to roll over funds before he met the Plan's eligibility requirements. They did not check with TPA. We found out about the rollover because the employee tried to obtain a loan from the Plan - which was denied.

When we requested that the Recordkeeper disgorge the funds, they never acted on the request. Because the Plan has a 3 month waiting period, the employee is now eligible. If the funds stay in the Plan (with Trustee direction), should we do an Amendment to permit this employee early participation for rollover purposes? If not, what are the ramifications. This is an audited Plan.

Well, if the auditors catch it and comment, they will most likely say "don't do that again".  Doing the single amendment can't hurt, but maybe you just wait until you see if the auditors put up a fuss and make you do it.

I think you can self correct this with a retro active amendment.

Do you even need an amendment? The self-correction would be to distribute, then he could roll back once eligible. But he already is a participant, so has a deemed rollback.