One other thought: Perhaps the employer is suggesting as an alternative, in lieu of you paying back to the employer the amount of tax that should have been withheld, the amount that should have been withheld for taxes, which will be shown as withholding on the additional W-2 or correction on the W-2C, be considered to be a portion of the loan that is still outstanding and on which interest is due. Perhaps that is where the mention of interest comes from. The money credited to you as withholding is effectively money that is given to you, so you either need to give it to the employer to completely satisfy the loan or have that portion of the loan remain unsatisfied.
