Hardship/deferrals were not stopped

[WCC]

There are many threads on this topic but I cannot find the answer to my specific question:

Participant takes a hardship 7/1/2012. Deferrals continue. July 2013 the auditor informs the sponsor that the deferrals for the six months immediately following the hardship must be returned. Vendor sends a check to the sponsor for the deferral amount and says "make the participant whole via payroll".

Question: Logistically how does the correction via payroll happen? If the sponsor amends the participant's 2012 W2 then they also have to amend their quarterly tax filing and the participant has to amend his 2012 personal taxes. Is this really the only way to make the participant whole?

I am thinking the answer to my second question is yes, but thought I would ask.

Thank you

[K2retire]

If the participant doesn't actually receive the money until 2013, would you report it as income in 2012 or 2013? I don't have a good basis for an answer, but I think you can argue that it shouldn't be taxable until the year received. Of course, that will subject it to the additional 2% FICA withholding due to the 2012 holiday.

[masteff]

Might review the instructions for 1099-R, especially the part about corrective distributions. Arguably, the plan made a self correction under EPCRS.