Co-owner stole PSP money

[ERISA13]

A company maintains a Profit Sharing plan and has two co-owners (A & B). Co-owner B has 2 sons that also works at the company. Co-owner A steals a large portion of the plan assets and disappears. There is now a judgement against the plan requring the plan to make the affected participants whole. There is enough money remaining in the plan to make all the employees whole but co-owner B and his 2 sons want to just forfeit their account balances rather than the company having to replace those balances in the plan. My questions are:

1. Is this even possible for the company to not replace the portion of the plan assets that belong to co-owner B and his 2 sons?

2. If they forfeit their account balances do we show it as a distribution? Do they have to get 1099's?

This is not a situation I've come across before and am looking for some ideas on how to handle.

I appreciate any suggestions!

[K2retire]

Has their fidelity bond carrier been contacted yet?

[ERISA13]

The plan did not have a Fidelity bond in place.