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Typically the point of a new comp allocation is to give higher contributions to the key, loosely defined, people at the company, whether that's the owner or anyone else. That said, it would be unusual to see a non-owner benefiting at a higher rate than an owner, and it would be a red flag in the sense that you would want to verify that this is the client's intention. Not that it's wrong, just that it's outside the norm.

Tell them to read their plan doc before posing a question. ;)

Sorry about the length of this response. Outstanding loan principal is certainly part of plan assets. I would amend the plan and the provisions regarding loans, to explicitly authorize the plan administrator to limit/adjust loans where necessary to otherwise comply with the code/regulations. Many plans have such provisions regarding deferrals - to meet non-discrimination testing without triggering distributions. Similarly, the plan sponsor may want to curtail in-service distributions/withdrawals while a loan is outstanding. Note that the rule for RMD's for a 401(k) is not the same as for an IRA - in an IRA, you calculate the RMD separately for each IRA, but you can aggregate the total and take the entire distribution from a single IRA. In the 401(k) space, you must calculate and satisfy your RMDs separately for each plan and withdraw that amount from that plan. So, there is no opportunity for the taxpayer to aggregate her 401(k) plans to satisfy RMD. The exception to that rule is in 403(b) tax-sheltered annuities, where you can calculate the RMDs for each plan and then take the total from any one (or more) of the tax-sheltered annuities. Assuming the plan accepts IRA rollovers, and assuming the plan permits loan repayment acceleration (I would amend the plan accordingly if it did not so permit), the plan administrator would reach out to the participant and ask her to provide the appropriate amount (either in the form of an accelerated loan repayment or in the form of an IRA rollover), which the plan administrator will then turn right around and payout to meet RMD requirements. Assuming the individual just turned age 70 1/2 and the 1st RMD was due to be paid by April 1st 2017, I think you have a problem. The only saving issue here is that if it was the first RMD payable by April 1, 2017, we are talking about ~$1,679, where the $1,000 cash equivalent investment is just slightly short, and the 50% penalty would be ~$340. However, if the next RMD is not due until December, I agree with the prior commentary that loan payments (no less frequently than quarterly, level amortization) should be adequate to meet RMD requirements for 2017. A $45,000 loan principal @ ~5%, repayments to be amortized over 20 quarters (5 years), means a quarterly repayment of $2,500+ ($10,000+ a year). Assuming the plan document provides the plan administrator the authority to adjust existing loans, I would add a plan provision that all loans are subject to recharacterization into a distribution and a new, lower amount of outstanding loan principal to the extent necessary to comply with RMD requirements (or any other code/regulatory requirement). No cash is distributed, the recharacterization results in reporting a taxable payout (similar to a loan default at separation). That said, I think it would be rare to see a situation where an individual had a vested account balance of say $100,000+, who took a loan of $50,000, then soon thereafter, ended up with an account balance of only $46,000, where only $1,000 is in cash equivalent investments and $45,000 is the outstanding loan amount. Perhaps you can get there if the plan allows withdrawals while a loan is outstanding, but, if it does, why wouldn't those withdrawals qualify to meet the requirements for RMD?

Read the plan document. Many have "fail safe" language that will "top up" a required gate way contribution to pass the required test, even if it results in differing allocation rates for employees in the same group.

I'd start by saying you should of course check the document section on the gateway. Does the document itself allow you to raise a participant to a level needed to satisfy the gateway. If yes, you're done. If not, then I would think an -11g would be in order.

Is that non-owner an economic engine of the firm? Is he or she an HCE? Maybe the owner wants to keep costs down, but also reward someone for a job well done.

I can tell you that as a plan auditor, I see a lot of law firms that use the Relius/Sungard system in drafting ESOPs and other plan documents.

My former employer (an accounting firm) had interns all the time. Our plan excluded interns as a class, but obviously brought them in if they worked a year. It was rare for that to happen, but we did have the occasional intern that would work multiple tax or audit seasons and then have to enter the plan. It was looked at a couple of times by the IRS over the 12+ years I was there (and responsible for it's operation) and the intern exclusion was never an issue. YMMV.

Anyone who wants to do an ESOP on the extreme cheap has conclusively demonstrated that the decision to have an ESOP is a bad decision. ESOPS are such trouble that the high price tag is a screen against misuse. If you cannot accept the idea of a high price and engagement of competent advisers and service providers, then you are taking serious risk going forward with an ESOP, and not just legal risk.