Plan sponsor allocates a MP contribution to a participant who was not employed on the last day of Plan Year. 3 months later they find that the participant was actually termed and should not have recvd. the contribution.

How to correct?

If the contribution was made after the end of the plan year, just take it away from the termed participant and reclassify it as a pre-funding of the 2005 contribution.

If they also allocated Forfietures, what would you do with that?

Since your contribution was made in 2005, just allocate to 2004 what you truly need. Let's say you originally thought the allocation was $1,000 and this was all contributed in 2005. You had a $100 in forfeitures which required a contribution of $900. Now after your correction it turns out that the allocation is truly only 950. Just allocate $850 for 2004 and the other $100 as a pre-funded contribution for 2005.

I hope that makes sense.

Forfeitures are added to the contribution in this case.

It is only semantics. The principle is the same.