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Google "taxation of VEBA withdrawals" and you'll find a lot, including this, which indicates that distributions for qualified medical expenses should not be taxable. However, just because distributions were reported to IRS does not mean they were reported as taxable - double check your 1099. If you still have questions, contact the plan administrator, which should be listed in your Summary Plan Description. Hope this helps, good luck. https://www.investopedia.com/terms/v/voluntaryemployeesassoc.asp

Unless the sole proprietor has also adopted the plan.

I agree with NOT using 001 -- it will cause issues possibly with forms not being filed for years (dealt with this a decade ago and it was not fun). I'd keep it clean and use a later number