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The auditor has an immediate credibility problem when he says no one can get more than 25%. That is NOT the 415 limit (100% of pay is the limit). Just take a simple integrate plan with two participants at comps of $100k and $10k. Contribute 25% of that total comp, and the one who is at $100k will get MORE than 25% allocate and the other will get less. The auditor has significant "shortcomings". Now, if the employer contributes 30% for the two participants in a non-integrated plan (comp to comp allocation), they will each get 30% and the employer will have a non-deductible amount for which an excise tax will be due. But it is still allocated so long as 415 is not violated.

Ask for reasoning, cite(s).

Might these facts (and the rest of the situation) suggest that ABC has not really deprived Z of a reasonable opportunity to remain employed (perhaps by herself)?

The good news is that death benefits from NQ plans are not subject to FICA. See 26 CFR 31.3121(v)(2)-1(b)(iv).

A beneficiary is subject to RMD's? Oh, maybe I should have said the life ins. policy is not in her account. Yes, you need to read up on the distribution rules; suggest you (and everyone else!) purchase Natalie Coates reference Life and Death Planning for Retirement Benefits. The requirements will depend on whether the individual dies before or after his Required Beginning Date. Having said that, the insurance issue is different. The only issue appears to be IF she wants to keep the contract in force when participant dies. No problem. The plan strips out the maximum cash value (via loan) and transfers the maximum loaned policy to the ex. The taxable amount will be minimal (assume max borrowing of 90% leaving $12k of value on which she will have to pay income taxes. The remaining 90% (or $108,000) can now go into an inherited IRA for the benefit of the beneficiary along with the rest of the $1.2 million, out of which RMDs will now be required, based on the life expectancy of the beneficiary or the deceased depending on how old he was when he died. Make sure there is someone who is authorized to wind up the affairs of the participant following his death who will be responsible for making the loan and distributions in accordance with winding up the affairs of the plan as well. And lastly, PLEASE EVERYONE, start with a full explanation of what the situation is to avoid wasting the time of good people who are trying to help. The opening one line question is CLEARLY not the real question that needed to be asked. Everyone should endeavor to give MORE information than you think we need, and then tell us what it is you are trying to accomplish (in this case, it wasn't keeping the plan in existence, it was dealing with the stupid life insurance in the plan!!!!!) which certainly wasn't covered in the opening volley!