We just discovered that a participant in a 401(k) PSP took a $150,000 withdrawal from his earmarked account in Dec 07 and transferred the money into an IRA. There are no plan document provisions that allowed for this withdrawal (e.g., in-service distributions). We told him to put the money back in the plan immediately.

Assuming he puts the money back in (with interest, if applicable) by the end of July, do we need to go through VCP or is self-correcting sufficient in this situation?

Any input would be greatly appreciated.

Thanks!

Self correcting within 1 year is permissible, without a VCP filing, under EPCRS. If the money, with interest, is returned, I would suggest that you are ok. Don't think an agent would protest loudly on an audit (especially if an NHCE--even ok for an HCE, if you can track that the funds went directly into an IRA and were not used).

Thanks!

You might want to also consider whether there needs to be VFCP submission to the DoL. While the money was in the IRA it was outside the power and control of the plan trustees. Seems like that would be a breach of fiduciary duty, not holding those plan assets in trust, separate and apart from the improper distribution corrected under the EPCRS for IRA and tax purposes.