During 2000, a client of mine discovered that the incorrect deferral percentage (10% rather than 3%) was used to calculate employee contributions. In addition, the employer match exceeded the 3% of compensation base. The plan is now overfunded. I am unable to find a straight forward answer as to how this should be corrected. Does anyone have thoughts on this issue? Any citations would be appreciated.

In addition, one employee has left and taken his "overfunding" with him. How probable is it that the employer can get the funds back?

Treat the excess portions as "wages." Issue amended W-2 forms before due date of business tax return (to avoid the 10% nondeuctible penalty). Employees have excess contributions in account. Employee should remove before their due date with any gain to avoid 6% penalty. Have employer issue letter. Employee sends letter to trustee/custodial alon with distribution request. Ask trutee to code amount as the return of n excess. The gain is taxable and may be subject to the 25% penalty (if removed within 2 years) could always wait a year for 6%!