Ineligible employee deferrd in 2005. We followed the instructions in the ERISA outline and forfeited the account and the employer wrote a check to make him whole outside the plan. The Accountant is now asking me how this should be reported. Does she have to amend the w-2, 941 etc. for 2005? This would require him to amend his 2005 tax return?

Can she issue a 1099 of some sort for 2006? Which one?

From what I can gather, the amount was forfeited from the employee's account, the forfeiture was allocated as stated in the plan document and the employer reimbursed the employee and adjusted for earnings....therefore, I believe the bonus will be subject to the FICA and Medicare taxes, thus included in payroll and the W-2 for the year of reimbursement. You can deduce from this it will affect the participant and the employer for the 2005 plan year. Additionally, if the deferrals were included in the ADP test the test would have to be re-run without those deferrals.

However, at this point I am trying to determinig what the best approach to use for correcting this type of operational error is?? Retroactively amend , return or forfeit??