A former participant who had an outstanding loan was apparently misinformed during a transition from one service provider to another. The participant paid off his loan as he was told he could not continue the loan with the new service provider. The information was incorrect and during the black out period, his actual loan payoff was never applied so the loan is still outstanding but the money is now sitting in the plan. The participant would like to continue the loan in which case the funds need to be returned to him. This participant made his decision based on mistakes in fact. Can the funds be returned to him and he can continue to pay off his loan?

Did he continue to make payments during the black out period, and are payments still being made? If not you may have other issues to contend with.

I would suggest explaining the mistake to the new service provider - they eliminate the loan, and if the participant still wants the loan, he takes a new one from the new provider.

That would be the easiest way to avoid trouble - IMO

The participant wouldn't have paid off the loan had he not been given incorrect information. His payments were current prior to the black out period. Bottom line is, he wants the money back for the payoff and to continue making payments on the loan. I'm inclined to take out the payments that are due right now and return the difference as an error in loan repayments. What do you think?

Touchy situation. Depends on how many payments are currently due. I suppose you could argue mistake-in-fact, deduct the payments, credit the participant, and then be sure that payroll deductions are started again immediatly.

If you were to do that, you would want to document the entire process for a future audit.

Anyone have other suggestions for this situation?

Thanks for the feedback. That was my solution too. I was just looking to see if anyone might be on the same page as me or if I was totally out of line.