ADP/ACP Test Improved By Corrected Data

Mid-size 401(k) Plan (773 Participants) had ADP and ACP Testing done in late February 2020 for 2019 calendar year.  Plan did fail testing and remedial distributions were paid timely to correct failure.  Subsequent review of participant accounts found that Compensation and Deferrals Values provided by the Client's payroll system were wrong!  Corrected values were finally provided (August 2020, delays were related to "COVID impact" at Client), so testing was rerun.  End result is that testing results were improved for both ADP and ACP; therefore, remedial distributions paid were in excess of amounts defined by corrected testing.  It is my understanding that the Plan Sponsor is expect to collect the over payments, and return those monies to the accounts of the impacted people.  (Amounts range from $2 to $100.)  Questions are (1) is this correct, (2) how would this be done, and (3) how are taxes impacted/addressed by these refunds to the Plan?  Any assistance is most gratefully appreciated!

This sounds like an overpayment failure correctable under EPCRS. Under EPCRS the plan does not have to request repayment of amounts less than $100. From Rev Proc 2019-19:

Quote

6.02(5)(c) Recovery of small Overpayments. Generally, if the total amount of an
Overpayment to a participant or beneficiary is $100 or less, the Plan Sponsor is not
required to seek the return of the Overpayment from the participant or beneficiary. The
Plan Sponsor is not required to notify the participant or beneficiary that the
Overpayment is not eligible for favorable tax treatment accorded to distributions from
the plan (and, specifically, is not eligible for tax-free rollover).

Perfect!  Since the threshold is $100, what would you do for an over payment of $150.  I see validity in the argument that it is over $100 so it has to be collected and redeposited.  I could also see a reasonable argument that $150 is not much over $100, so treat it the same.  The former is of course a much stronger position.  Thanks for the reply CB.