an employee claims they never authorized deferrals to be deducted from their pay. the employer cant locate the salary deferral agreement. is the employer required to take action here? can they refund the money from the plan or if not can they forfeit his account and refund the money through payroll?

Looks like an operational failure to me, and probably a violation state wage withholding law.

i tend to agree....failure to follow plan document because no salary deferral agreement but how would you suggest correcting. i would like to give the guy his pay via payroll and forfeit his account balance in the plan.

I would be a bit careful. Look at all the facts (like how long this has been going on) and try to evaluate if this might just be an attempt to get to $$ not otherwise available. Of course, the lack of a deferral election form makes it pretty clear. And try to discover how the error was made (i.e., wghether there is someone else with a similar name or SSN who is the one who should have had the $$ deferred).

If you conclude the deferrals were in error, you might want to keep the funds in the Plan (to apply to other deferrals), and make the individual whole through payroll (if that is administratively possible).

maybe this is a stretch but can i refund the unauthorized deferrals to the employee on the basis they are "excess deferrals?"

So the employee never noticed that his pay was being reduced every time he was paid or checked his pay stub?

And how long has this been going on?

Tell us that the employee is complaining because he just received his w-2 for 2008 and noticed the deferrals to the 401k plan for the first time.

Or how about since the market tanked, the participant wants the deferrals back which conveniently exceed the account balance?