ADP Test in Error

We have a client where we review their ADP/ACP tests and prepare the Form 5500.  The client determined that the ADP test failed and they refunded the approximately $1,500 back to one of the HCE's.  The problem is that the client did not perform the tests properly and the Plan did not fail the ADP test.  Thus, there should have been no refund.  

We now have a situation where deferral money was distributed to a highly compensated participant who was not eligible to receive a distribution.  I am clueless as to how to fix this.

Any thoughts out there....

The qualification failure is a simple fix. The plan made an in-service distribution that should not have been permitted. You can self-correct under EPCRS by having the participant repay the amount to the plan.  See Rev. Proc 2018-52 6.06(4).

Correction principles also require that the underlying problem which caused the failure be addressed. In this case that would mean that the client stop performing their own ADP tests and leave it to the qualified professional going forward.

Thank you so much for the information.