tax withholding pd outside of trust, now what

[TPApril]

Prior to us taking over a 401k plan, the employer paid the IRS directly from her own funds the 20% withholding amounts that were withheld within the plan from multiple accounts cashed out from the plan one year. Rather than asking why, we just wanna figure out how to reconcile the amount that is now stuck in the plan but does not apparently belong to any participants anymore and would seemingly be reimbursable to the owner. Not comfortable paying this to her but dont really know what to do.

[ESOP Guy]

I can't cite anything to say this is correct but the effect is the employer made a contribution. Allocate the amounts as ER contributions.

Think of it this way. If they had done it right the money would have been paid from the trust and then a like amount would have been deposited into the trust. You would get to the same place as what you have currently.

So allocate it as a match or PS contribution is my answer.

Can I prove it fits the self-correction rules? No, I can't do that. But given the facts I think that is what one argues.

[Bird]

I dunno, I think I could make a case that she loaned the plan money, so it should pay her back. It's a PT and I'd make her pay the excise tax to teach her a lesson but I don't think there's anything wrong with the approach.

[Peter Gulia]

If the employer loaned money to the plan, consider whether it met all conditions of Prohibited Transaction Class Exemption 80-26, as corrected and amended several times.