An employee was allowed to make deferrals before he was eligible. He is still employed, and is now eligible and making deferals. Do we have to incorrect his incorrect deferrals and match?

Technically yes. See Revenue Procedure 2002-47 and your plan document. Both should say what to do.

But if you won't tell, I won't.

If it's just one person, one time, I just don't see it as a deal breaker. Unless of course the person is an HCE or an owner or something like that, and it appeared to be discriminatory.

Well, how long were the incorrect deferrals being contributed? If it was a whole year or more, then you may have a problem. A couple months you may get away with.

it was all of 2002.

do you think an acceptable correction would be:

Forfeit the match, to be used to reduce future er match.

Sell the ineligible deferral amounts. Which b/c of the market is less than the actual deferral contributions. USe it as an offset to the next deferral contribution amount.
Have the ER make up the incorrectly deducted contributions to the participant out of Company general assets. Therefore the participant will receive the money back and it will be included in his 2003 w-2 amounts.

So all the money that was incorrectly contributed to the account, will be removed.

Practically speaking, I think that that's the easiest way to correct. However, the participant received the "deduction" in 2002 by not paying taxes on his entire income. Wouldn't it be better to amend the 2002 W-2 to reflect that he didn't contribute?

How many employees are there? If there's 5 I would be more concerned.

If there's several hundred I just think, absent any other pertinent info, its just not that big of a deal.

No one can be perfect all the time. I think that the laws of statistics suggests that there are always going to be problems like this. For every one, like yours, that's found there's probably a dozen more that are not found.

So the employee got a few extra bucks in an isolated administrative mistake. So what?

Maybe I'm being to lax on this...

Any help here? http://www.reish.com/practice_areas/Techni...ps/IRStip91.cfm

This type of error is easily detected in an IRS exam. The IRS can download payroll and benefits data and run reports that identify discrepancies in eligibility dates.

The IRS frequently forms a judgement about how good the employer is in overseeing and monitoring the plan. If it thinks the employer does a bad job, it may scrutinize the plan more closely and be harsher about assessing penalties. If the IRS finds that the employer has a policy of detecting and correcting errors, it may be more lenient