There doesn't appear to be an EPCRS correction method for this problem. Do you apply the general correction principle of putting the participants in the positions they would have been in had the failure not occurred? If this is the case, should their elective deferrals made during the 6 months after the hardship distribution be taken out of their plan accounts and taxed? Thanks in advance.

In my opinion, refunding the deferrals, plus any matching contributions that resulted from it, adjusted for earnings would be a reasonable correction method. I also think that starting the 6 month clock a bit late might also be appropriate (not to mention easier all around), depending on the situation.

I agree it's an appropriate correction. The problem from the recordkeeping standpoint is that the 1099R does not have a code to match this distribution. I've heard that if you start the 6 month clock later you can only do it via a VCP.

I believe a better method would be to move all the money to a forfeiture/suspense account (including earnings). The Employer then would make the participant whole outside the plan & update w-2's accordingly. Of course this only works if the error is fixed in the same tax year it occurred because of the w-2 issue.

Unfortunately, the failure to stop deferrals after the hardship occurred last year, and the 6 months already has passed so it doesn't seem right to stop deferrals now for 6 months.

We have submitted a VCP to the IRS on this very issue. Initially, we proposed to take out the contributions that should not have been made plus earnings and this was approved. In attempting to implement this, however, we found that most of the affected participants did not have sufficient amounts in the money types in question (because of subsequent loans and/or withdrawals) to make this an unworkable solution. We went back to the IRS and they proposed a prospective suspension. The problem was that a number of years had elapsed between the time the amounts were improperly contributed, the first compliance statement was issued and then the second VCP requesst was submitted and resolved and a final compliance statement issued, that the participants who were impacted complained that the prospective suspension would be coming when they earned a much higher rate of pay. The bottom line is, if you are consider the refund method, take a look to see if there would be sufficient money in the participants' accounts to effect the refund. If not, then use the prospective suspension.

An auditor has determined that for 2 hardship withdrawals, the 6 month suspension occurred, but not right away. The first participant went 4 pay periods after the hardsip before the suspension started, but they did suspend deferrals for 6 months.

The second participant received a hardship on 11/4/2008 and HR did not start suspension until 4/7/2009.

If they did not suspend at all, I would know what to do, however, what about the delay? We want to impress on the plan sponsor the importance of following the rules.

Thank you.

Kate Smith