When there is an invalid rollover contribution and the amount grew before the refund, the reg is clear that the earnings must be included in the refund. But what if there is a loss?

Say a participant rolled over an mount from a 457 plan to a 401(k) whose plan document prohibited rollovers from 457 plans. The participant rolled over $7,000, and the TPA made a mistake of accepting it. The mistake was discovered a few months later, and now there is only $4,000 of the money left. Should the participant get $7,000 or $4,000?

$4000 from the plan. Maybe more from someone else, a more interesting question.

Thank you. Do you have any authority for that? Given that the reg clearly says that earnings must be added, I figured that it's very plausible that the losses must be accounted for. But, I also thought that maybe the innocent participant should get the larger of the two amounts (the original amount and the final amount with earnings/losses considered). That's not the case?

FYI, I think I found the authority. Section 6 of Rev Proc 2008-50 is Correction Principles and Rules of General Applicability. Section 6(4)(e) says, "[i]n a case of a defined contribution plan, a corrective contribution or distribution should be adjusted for earnings (including losses) from the date of the failure . . ."