A plan with pooled investments pays out a participant 100% of her account balance even though she is only 20% vested. In addition, the distribution was a lump sum to the participant and no taxes were withheld from the distribution. How do we handle this? Should we try to recover the 80% she is not entitled to (probably a lost cause) as well as the 20% that should have been withheld for taxes. Then, deposit the 80% back to the plan, forward the 20% withholding as taxes and amend the 1099-R for 2000?

Does anyone have any comments?

Yes, that's what you have to try to do.

It's what you when that does not happen that I think gets interesting. Do you then report the 20% as a distribution from a qualified plan and the balance as ordinary income? I don't think that you do anything about the missed withholding.