I have an unusual situation. The school district that my husband was employed with as a football coach withheld required employee contributions to the state retirement system (PERS) from his paycheck. We looked at his PERS account online a few years into employment, and were shocked to see a zero balance. In calling PERS, we found out that he was never actually eligible to contribute, and they had returned the money to the school district some time ago... And the district never said anything to us or returned the funds. Meanwhile, the district continued to withhold for these contributions from his paychecks, with the funds basically residing in neverland. Once he approached the district about it, they researched it and issued him a check for $2659.18, as the total of his withheld contributions during his employment.
The question is... How do we report this?!? The returned contributions were taken out from 2020-2024, but the district didn't pay him back until 2025. The district payroll office did not include this on a 2025 W2, as "W2's only report wages paid for services performed in the calendar year. These prior year contributions fail that test. They are not pay for work performed in 2025 and they are not a current year retirement contribution or payroll deduction. Instead, it is a return of money that originally reduced taxable wages in a prior year. Including it on the 2025 W2 would incorrectly inflate 2025 earnings." In addition, it was never reported on a 1099-R, as the state retirement system sent the money back to the school district. As such, we have no tax documentation associated with these funds.
