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Perhaps, this is simplistic, but why don't the parents just write checks each quarter from their personal account and make a gift to him. Son then just writes loan repayment checks.No implications for Company, Plan or other taxes.

I'm honestly baffled by the extent of this thread. I fully understand the opinion that the IRS stance is stupid or ridiculous, but when has that generally been the determining factor? It seems like it is more about "winning" a discussion point than it is about what the IRS regulations say about it. Tom already quoted it - (1.401(k)-1(a)(6)(iii)) - I don't see how one can read the plain language here and come away with anything other than that the deferral election should be signed by 12/31. They specifically mention both a partnership or a sole proprietorship. (iii) Timing of self-employed individual's cash or deferred election. For purposes of paragraph (a)(3)(iv) of this section, a partner's compensation is deemed currently available on the last day of the partnership taxable year and a sole proprietor's compensation is deemed currently available on the last day of the individual's taxable year. Accordingly, a self-employed individual may not make a cash or deferred election with respect to compensation for a partnership or sole proprietorship taxable year after the last day of that year. See §1.401(k)-2(a)(4)(ii) for the rules regarding when these contributions are treated as allocated. If you want to argue that the IRS doesn't enforce this requirement, or that there is little or no "risk" or that you have had lots of plans ignore this requirement and it hasn't been mentioned on audit, then that's a different story. But to my weary brain, the "correct" answer, backed by the regulations, is that ya gotta have it signed on or before 12/31.