I have a new client who used to have a SEP account. This owner, acting on wrong information, was withholding salary deferrals and contributing that on behalf and the participants into their SEP. (They were treating their SEP as a SARSEP.
Anyway, they have terminated their SEP and started a Safe Harbor 401(k) Plan.

In the meantime, the employer withheld one last time and sent on the contributions to the SEP. A couple of participants have already cashed out their accounts.

The investment company returned a check to the employer FBO the plan.

Since this is employee money, how should they return this contribution to the employee??
They have to deposit this check into the plan? (not the new plan)!

They need to give the money back to the participants via their paycheck to be taxable to them, but how?

Thank you for your input.

Contributions were made to the SEP by an employer. The SEP may need to be fixed under the EPCRS. If there are any 415 violations, the SEP is disqualified last. Since the plan was a SEP, the employer could treat all contributions as employer contributions and restore the wages that were "withheld." Contributions should be made under the uniform allocation formula under the plan. Additional contributions may have to be made and more than one year may have to be fixed.

I think that fixing the SEP is very important (not to mention the ongoing 10% penalty for nondeductible contributions).