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@Belgarath @ETA Consulting LLC @actuarysmith @Bill Presson I submitted this question for this years ASPPA Annual "ask the experts" panel discussion. Sal Tripodi maintained his position that it should be tested as separate controlled groups for the reasons outlined above. Another panelist pointed out Derrin's position and that there is no real consensus on this issue and that there is no direct guidance. It was also mentioned that when discussing the issue with the IRS for a prior year IRS Q&A, the IRS answer was that either approach "would not be an unreasonable interpretation".

Just remember that the IRS response is always deemed to not be a resource AND it wasn't said at this conference. Adam Pozek remembered it from a few years ago. But if your plan ever gets in trouble, Sal or Ms Ilene or Ms Kelsey are available for hire to help get them out. :)

The employment agreement is ultimately the document.

Nope. Good Luck!

Is the date of first repayment date longer than the regular loan period and is interest accrued daily? If so it's probably the first payment throwing off the calculation.

FWIW, in my opinion, this arrangement would not be considered a "pension plan" under the accounting standards.

CuseFan's answer very well have answered the direct question. This might be outside the control of the question asker but... The determination if a person is an employee or an independent contractor is a legal question and NOT subject to negotiations. Either the person is an employee per the law at which time they by law should be treated as such. That would include having the needed taxes withheld and their income reported on a W-2. Or the person is an independent contractor by law and as such should be treated as such. Thus, the person can't be in the plan and the income ought to be reported on a 1099. The language CurseFan quotes is in plans in case a court rules a person who was treated as a contractor is ruled an employee the plan would not be required to go back and cover the person for those years. I have never understood that language's purpose is to allow you to ignore the law regarding who is or is not an employee. Thus after the court rules the company could not keep that person out of the plan by continuing to claim the person isn't an employee. They would have to change the plan to exclude a given class of employees if they don't' want to cover the person. When I say this isn't subject to negotiations I mean just because the employer and the person performing the services agree to 1099 the person is irrelevant. You can't negotiate a contract to break the law if indeed the person is an employee by law. The fact you start by calling this person an employee and then talk about them getting a 1099 suggest the real problem is someone might be breaking the law on how this person is being treated for tax law purposes. And that is the reason the plan's language doesn't seem to work. It wasn't intended to cover situation where the law is being broken.

Financial planning implications aside, if a participant rolls from an IRA into a qualified plan they now have a qualified plan rollover account in the plan (not an IRA). Provided the PSP allows for loans from rollover accounts this is permissible.

Notwithstanding whatever may be allowed by the rules, the entire justification for favorable tax treatment given to IRAs and PSPs is that they are intended to accumulate funds for RETIREMENT. A mortgage that cannot be covered from current income is essentially unsupportable (absent extraordinary circumstances), and the best solution is probably to step down to less expensive housing.

Why people do this is beyond me. It would have been so much simpler if they had said that on his 5th anniversary, subject to whatever conditions they choose, he gets a BONUS of $250,000. By making it "$50,000 per year" makes it seem more like a "plan" and it is actually meaningless because it's "all or nothing" after 5 years - the only number that is relevant is $250k. I would argue it isn't a plan - it is an "employment agreement" inartfully drafted. Tell them not to do it again.