In my opinion, it sounds like it SHOULD have been taxable wages for 2016. So the "proper" course would have been to amend the 2016 W-2, which would make you need to amend your 2016 tax return (and owe taxes on that).
The employer just took a shortcut. While technically wrong, it avoids everybody from having to amend, and the 'net' result would likely be pretty much the same.
In other words, if you were to 'fight it', the employer may need to amend your 2016 W-2. That would mean you would need to go amend 2016 and owe just as much money, if not more (because of the interest owed to the IRS) than just leaving it as it is now.
