Discovered that a loan was over paid, and now the plan's investment account has excess loan payments in it. We figure that we need to refund those excess loan payments. Should we also calculate earnings attributable to those excess loan payments?

Also, it seems that taxes should not be taken from the excess payments since they shouldn't have gone in the plan in the first place (the loan was paid off, but money was sent in in error). The earnings should be taxed...right?

Does anyone have any thoughts on this? I can't find anything anywhere that tells us what we should do.

Thank you.

Keep it simple and just return the loan overpayments. Another alternative, is the participant elects and if plan has after tax contributions is simply to recharacterize the amounts.

Just curious- on what basis will you distribute the money from the plan? Mistake of fact?

Yes. The sponsor just kept on deducting loan payments and remitting them without checking to see when the loan was paid off.

Another question...do we 1099-R? I think not...right?

No 1099. Mistake of fact is reason. I owe $1000 P&I, pay back $1,050. The $50 is over payement and gets returned. If not it has to be recharacterized as after tax contribution. You can't overpay the loan to slip more $ into the plan. If you could some HCEs would take advantage of this to get around comp and contribution limits.