It complicates things a little when you deduct the employee's repayment from wages since this is nothing that is matched, or that is exempt from taxes for the employee. It is far far better to have the employee directly repay the fund. His/her withdrawal should not have entered your books at all and the check from the fund should have gone direct to the employee. But if you are going to handle the repayment from wages here is what you must do.
Set up a Other Current Liability for the repayment only and not the entire withdrawal. As a payroll deduction it is entirely after tax, same as you would for child support or employee buying tools or uniforms through you. When you deduct from wages you will post to this OCL account. When you submit funds to the 401k fund you will debit (or pay against) this liability. Between pay periods and after submission of funds to the 401k the balance of the liability should remain at zero.
