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I agree with Lou this is too complex to decide without proper legal advice. The cost of a prohibited transaction violation is too high to risk it One thing to look at is taking the stock and not putting it into an IRA. You should look at the Net Unrealized Appreciation (NUA) rules. If this stock has been a C Corp the whole time your cost basis could be very low (it should be the price of the stock when the ESOP bought it way back when) and if you take a stock distribution you would only owe taxes on the cost basis. The appreciation isn't taxed until you sell and then it is a the capital gains rates. You lose that when you put the stock in an IRA and it all becomes ordinary income when you take it out of the IRA. So you may pay some taxes now but have a lower tax bill in the long run skipping the IRA. If you never sell the stock you may never pay taxes on part of the distribution or at least income taxes it would still be part of an estate An IRA you would have to take RMDs at 70.5. So besides a lawyer for your question it might be worth having a CPA help look at all the tax options. Not trying to spend your money on professionals but this sounds like one of those cases were a little up front costs could be cheaper then the costs of getting this fixed afterwards or done wrong. I admit I am assuming here a bit. You very well could have run the NUA numbers already. If that is so I guess ignore the above.

I would recommend the Plan Administrator (eg employer) not approve it. Credit risk is still supposed to be a portion of the approval process even if a credit report isn't pulled.

For your "twist", I thought that if she attains 70-1/2 in 2016, was still employed on 08/01/16 when she took her full distribution as a rollover to an IRA, and subsequently terminated on 09/01/16, then her 2016 RMD piece is ineligible to stay in the IRA, and has to be "removed".

1 - I agree. Not a problem for 2015 annual addition. 2 - Agree subject to 25% deduction limit I see no reason why it can't be deducted for 2016. 3. - N/A because of 1 & 2.

You can change it so that future participants are subject to the 4 year schedule but folks that are already 100% vested can't be switched at this point as you'd have a 411(d) cutback. I mean I guess you could technically move folks with less than 3 years of service to the new schedule as long as you preserve the vesting they attained under the old schedule which is ...100%.

I don't know the answer to your question but my recommendation would be for you to see a qualified attorney who is has knowledge in the ERISA and IRA investment area.

It's not explicitly stated in the question but I think we're talking about a 401(k) plan here. He's talking about a contribution for the year of $X, with the owner's share being $25K. The owner contributes his piece on 1/1 and contributes the piece for everybody else (presumably NHCEs) as late as possible. The overall test passes but the timing is certainly discriminatory in favor of that owner. I'm with everybody else here. I can think of a couple good reasons not to fund a nonelective contribution throughout the year but "you have to crosstest every deposit individually" isn't one of them I've heard before.

Just one more reason that excluding compensation is usually a bad idea!

Get thee to an ERISA attorney. Pronto.