Distribution to non-terminated employee; taxes withheld

[401king]

A plan sponsor assumed a participant would be terminated as of 4/1/2010. On 4/1/2010 the participant submitted distribution paperwork to take a direct payment of the funds. Taxes were withheld, distribution was processed as normal.

Turns out, the employee never terminated... So, now we (the TPA) are trying to figure out what to do. Here is my assumption:

Participant writes a check to the plan for the full taxable amount of the distribution (including the 20% withheld). A 1099 would be issued with a tax withholding amount (20% of the distribution amt), but $0.00 under taxable amount and distribution amount. This way he would be able to deduct the withheld amount, but not be taxed for a distribution.

Is this just "the easy way" of fixing this (thus, making it the wrong way)? We suspect it will be difficult if not impossible to get the withholding amount back from the IRS.