Let's suppose a client determines that a participant wasn't eligible to receive a profit sharing contribution after all.

The deposit had been made, the deduction had been taken from the employer's tax return, and the tax return had been filed.

Is it appropriate for that money to be returned to the employer, or should it be deposited in a forfeiture account and be considered a plan asset?

It would not be appropriate to return to the client. Your document will tell you how to allocate this contribution. If it is a basic non-integrated formula then that amount needs to be reallocated in this manner.

Agreed.
Generally, the excess amount is credited to a suspense account to be allocated to participants the following year. Returning the amount to the employer could be cause for disqualification. Your heading says “Mistake in fact”, but this does not appear to meet that definition. See the following for additional info http://www.benefitslink.com/boards/index.p...topic=14199&hl=