2005 401k reimbursed to employee that was not eligible

[Guest akv]

I apologize if this topic has been addressed before. I was directed to here from another forum.

We had an employee that had around $350 for 401k withheld in 2005. I just received a letter from our 401k administrator (along with a check for the amount of his deferrals) that states that he was not eligible to defer until January 2006. The letter just says that we should tax the employee on the money.

What form do I fill out to ensure he gets taxed on it? There seems to be several theories from (1) simply adjust his 2006 W-2 (because that is when he is receiving the money back), (2) give him a W-2c for 2005 or (3) give him a 1099 R for 2006.

Any assistance you can give me is greatly appreciated.

Angie