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Well, they have to report your earnings and withhold your taxes because you are a W2 employee. It is easier to work with them otherwise if you do not repay this, then it would be taken as a lump sum by the state taxing authority or the IRS. I totally understand your concern since this was a mistake on their part, but the IRS and state taxing authority are more concerned with collecting the money owed than who made the mistake.
So clearly some error took place and they are trying to comply with the regulations retroactively.