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I think Duckthing hits it correctly. There are rules regarding terminations knowing the person is going to be rehired to just get a distribution. Look up the term "bona fide termination" and retirement plans. http://www.employeebenefitsupdate.com/benefits-law-update/2015/2/12/when-a-termination-is-not-a-termination.html If this person comes "back to work" shortly after they are terminated this blows up. I also agree a sole proprietor can't fire them self in my mind.

I would tell the accountant to look up the phrase "sham termination". (If he's a sole prop the idea of firing himself doesn't make any sense to begin with.) Is there a reason the sponsor can't just amend the plan to allow himself to take a hardship?

The document may be more employee-friendly, but under the law I believe that all you need to do is to give the participant the option of a direct rollover within the time frame specified by the regulations, but absent such an election you can send the participant a check minus 20% FIT withholding. I am going on memory so hopefully someone will correct me if I am wrong.

About 30 years ago when I was a youngish attorney I was invited into one of our conference rooms to discuss some issues concerning the implementation of benefits for a company - our client - that had recently bought the assets of an ongoing business and inherited its employees. A couple of the owners were there along with the lead partner from my firm on the deal. This exact issue scenario came up. I wasn't asked for my opinion but I volunteered something like "this would raise ERISA prohibited transaction issues." They kicked me out of the conference room.