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I'd consider this a clerical error (on the basis that the participant did nothing wrong), change the election to let the person do what they want, and move on. And consider whether it really accomplishes anything to restrict changes to quarterly. I set up all of my plans to allow changes every payroll and have never had a problem with that causing too much activity, and the kind of problems discussed in this post simply do not exist. Generally, people set their deferrals and leave it alone. Having limited change periods might actually increase activity; people think they have to "do" something when the time comes up.

even if it didn't and if I needed it I would still fill in the line special extension and write, perhaps "Did you read the newspaper or watch TV about how hurricane Matthew shut us down???"

See Bill Presson's post above. It seems likely that he already is an owner-employee and that nothing special needs to be done...except that all prior tests were wrong. Now, if the income is in fact being treated as passive income and he does not have self-employment income, then you have a couple of questions - 1) is that legit (see jpod's post), and 2) if it is legit, then why would it suddenly, for business reasons, be legit to change that? Having said that, I find it hard to believe that an owner has absolutely no involvement and absolutely no "earned" income from this venture. Paying him something would not be a stretch. But paying a partner on a W-2 is wrong, and paying him $0 accomplishes nothing, IMO. It sounds like there are a lot of people involved who have a hint about things, but only enough to be dangerous. I'd start by finding out exactly how he gets paid and work from there.

Forget about 5500's, there's probably a "few more" 1040's that are hanging in limbo...

Check what your Plan Document says about Catch-Up Contributions. In the Plan Doc for our 401(k), Catch-Up Contributions are defined in the Definitions section and in the Employee Contributions section. These sections say the usual things about catchups, namely, that they are elective deferrals made to the Plan that are in excess of any otherwise applicable Plan limit and that are made by Participants who are age 50 or older. The standard set of 'otherwise applicable limits' is listed in both sections. There is no mention of a need for a separate election to make catchup contributions. Unless your Plan document prohibits Participants from making catchup contributions unless they separately elect to make catchup contributions, take your Plan Doc to the vendor and ask them to show you where it says that this person is capped at $18k. Personally, I would ask the vendor if they really want to be making a fiduciary decision to limit Participant contributions (unless the limitation is in the Plan Doc or is an instruction from the Plan Administrator). And then I'd start looking for a better vendor. I'm a little peeved about this, because the change of deferral election form from our plan vendor has a section for electing catch-ups. We stamped "VOID" on the form and made our own deferral election change form. [Oops. I guess my previous post wasn't the end of my rant. My apologies.]

Catchup 'happens'. One does NOT sign up for catchups. In your case khn, if someone who signed up for catchup terminates before deferring $18,000 in total, what do you do with the supposed catchup? unless you have a limit, if that person deferred $9,000 and elected an additional $3,000 for catch up, then the testing is for $12,000 and no catchup. After all these years I find it surprising that payrolls are still separating catchup because that is a testing issue, not a payroll issue.