Does anyone have any comments on this situation:

For a calendar year plan, the 1998 ADP test was not performed until late December 1999. The ADP test failed, and due to the short notice the employer made the refunds directly from the company. They were supposed to make a distribution from the trust to reimburse the company, but this fell through the cracks, and the refund has STILL not been made from the trust.

I'm pretty sure I have a problem here, but not sure how big a problem this is. Any comments are appreciated.

The employer refund to the employees does not cure the excess contribution. The funds are still in the trust in violation of IRC 401(k)(8) which requires the excess contributions and attributable interest be distributed by 12/31/99... I guess the plan has been disqualified and needs to apply for VCR. By the way how were the refunds reported to the IRS? Did the plan have similiar problems in later years?

Second: How can the employer get a refund from the trust -- isn't this a Prohibited Transaction under IRC 4975©(1)(E)..fiduciary dealing with plan assets in his own interest or for his own account or the lending/exchange of money between the plan and a disqualified person under 4975©(1(A). This PT should be reported on the 5500.