Can anyone give me some guidence on this issue? I took over plan that has allowed hardships to be paid to participants. The plan document does not allow them. The processed hardships were in a prior year. How can I correct this?

EPCRS (Rev. Proc. 2001-17) provides a correction method for this type of problem. Also see the following link:

Correction Method

Thanks for the quick response. Can I ask, what is a walk-in in CAP?

CAP is the acronym for Closing Agreement Program. Basically, once you have identified the problem, you submit the problem to the IRS and specify how you propose to correct the problem. Since you voluntarily submitted, the plan sponsor will be subject to lower sanctions than if the problem had been discovered on audit.

Attached is Rev. Proc. 2001-17, which outlines the different correction programs.

The IRS has dramatically improved it's correction programs, so don't be afraid to take advantage of them if you discover a problem with your plans. (Although you should definitely consult with ERISA counsel if you discover a large problem which might involve a hefty sanction.)

Thanks for the great information. It really helped! It answers all my questions on this topic.