What now?

[Guest STP20004]

Does anyone have any thoughts on how to handle a situation where an FSA administrator failed to withhold any wages in accordance with the FSA plan participant's salary deferral election? Note, the plan year ended 12/31/05 (with the exception of the 2 1/2 month grace period and administrative run-out period). The employer has indicated that it is okay with reimbursing the ee for his qualified medical expenses as a 106 expense. My thought is that this fix would be okay (however, the participant would, in theory, be a "zero" for nondiscrimination testing). Any thoughts? Is there any guidance on this issue? I can't seem to find any.