I know the safe harbor requirements include a 12-month cessation of deferrals after a hardship withdrawal. I can't find any discussion of the penalty if deferrals continue. I have a case where a hardship took place in Dec. 1998 and the participant continued to defer in all of 1999. Can anyone provide a reference in the regs for this?

It depends on whether the plan is using the "deemed" hardship definition (which includes the suspension requirement) or the "facts and circumstances" definition (which does not). I'd start by reviewing the plan document, you may not have a big problem. In terms of penalties, you're looking at a qualification defect if your plan does require suspension.

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Jon C. Chambers
Principal
Schultz Collins Lawson Chambers, Inc.
(415) 291-3004

check Question #21 under the Q and A for plan defects
It was written in 1997, just when APRSC was coming into use, but the recommendations should still apply.

TAG (Technical Answer Group) has an answer to exactly that question posted on their website (www.tagdata.com) under the Q&A section.

In the book "Saving Your Qualified Plan" (published by CCH), there is a list of previously approved VCR requests on a variety of compliance issues. Regarding the failure to cease deferrals after a hardship withdrawal, the IRS approved the immediate suspension of deferrals for 12 months for active employees; nothing was done for terminated employees, since their deferrals had already ceased. In other words, nothing was done to go back and refund deferrals that should not have been made -- the correction was prospective.