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Not 1,000 hours. So, no. Person is no longer retired.

This strikes me as the "devil is in the details" kind of question. Are the plans that are ending being truly merged or are they being terminated and the people have a choice to take the funds or put them in the new plan? If it is a merge (the employees have no choice their money is going to the new plan because the trustee/sponsor said so) then I would tend to agree such characteristics as ee vs er have to be preserved. (In a merger if there is a source of money that required spousal consent that would have to be preserved also.) If the plans are being terminated and the people have a choice to take the money run, put in an IRA or the other plan that would be a rollover source. There might be other factors that could influence this decision but that seems like the most important one. (Lou must have answered while I was typing and I didn't notice it)

Is "a drinking problem" when one runs out of something to drink?

or a drinking problem......

I see, you were answering my query, not responding to the original assertion. I looked it up and my query should have been answered as follows: 1) There is no minimum threshold for direct ownership. So, A is considered to own the 2% that A actually owns of the parent. 2) There is an implication that parent directly owns some portion of sub (otherwise it shouldn't be described as parent-sub). Perhaps parent owns 94% of sub and person B owns the other 6%, directly. 3) If so, then anybody who owns 5% or more of parent (which neither A nor B does) would be considered to own their pro-rata share of parent's ownership in B. None of that matters in this case. Sorry for the misdirect.

EPCRS is available only for tax-qualification violations. The tax-qualification violation here is 401(a)(2) - exclusive benefit. EPCRS is not available to cure exclusive benefit violations. There is no relief available to exposure for plan disqualification here, but the faster it is corrected the better story you have to avoid disqualification. The original advice is the only advice worth giving here: the amount should be repaid ASAP and the excise taxes reported and paid ASAP. Do it today, even if the owner has to put up his own money and even if he has to beg, borrow or steal to raise the money to do it.