We just discovered that payroll did not withhold medicare tax for the retirees SERP value at the time they retired. The retired officer should have had the value of his serp taxed at termination. Since his salary was at the maximum for SS, he would have only had to pay medicare. Its now 2011 and the employee retired in 2004 and has been receiving SERP payments each month since then and has been getting a 1099R for the payments but no tax withholding.

Has anyone ever run into this or heard of anyone running into this. We are trying to find out what our options are as the employer.

1. Can we have our actuarials figure out what the serp benefits would have been at the time they retired and then pay the tax for the employee and employer? Would this then be taxable income to the employee since we are paying it for them? Since it was our fault, we didn't want to have to have the employee pay.
2. To correct it would we fill out a w2c for 2004 and then a 941x for 2004? Would the penalty that we owed be from the date we found the mistake (January 2011) or would the penalty and interest calculate from the time we should have paid the tax which was 2004?
3. Could we even go back to 2004 and ask the employee to pay the amount or is that something the ER has to pay now? If we paid for 2004 is that something we have to include on the retired employees w2 in 2011 to show that we paid the taxes for the employee?
4. What is the best policy to approach the IRS with this issue?
5. Can we even fix it now or would the retiree have to start having SS and medicare tax taken out of his SERP payment until death?

Any suggestions would be greatly appreciated.

camille1996