It occurred to me that this may be a school whose employees don't have Social Security coverage.  He should still be paying Medicare taxes, though, and that may have already been refunded, or figured into the calculation of how much he has to turn over.  I doubt they would be required to amend W-2 forms.  What's interesting is that if this were a straight compensation case -- repayment of a sign-on bonus, for example -- he could have already started collecting SS benefits based on the higher income, and those may not be clawed back. 

Still sounds like a salary reduction to me, rather than a partnership agreement involving outside income.  But IRS may not take too close a look at it.  There were a lot of Section 1341 fraudulent claims a while back that made it through the system.  I haven't heard that they have enough people to tighten up the reviews.