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Yes. Often when you hear bizarre statements like this, it is the client re-stating what they think they heard from the TPA, not what the TPA actually said. This is not always the fault of the client. It is incumbent on us to constantly strive to communicate clearly with clients. It is difficult, as this is a very technical area where logic doesn't necessarily apply, and our industry jargon does not help. A favorite of mine, how many times has a prospect or advisor told you their HCEs keep getting ADP refunds because the plan is "top heavy"?

Wow! Good thing they now have a new TPA. For poops and giggles, I'd have the client go back to the prior TPA and ask them what the penalty is (and for maybe a cite). Have them say the new TPA doesn't know what they are doing and they want some clarification.

I would recommend clarification on the wording. I have had clients and contacts misinterpret what previous TPAs had meant on take-over cases. Maybe the prior TPA had said there are penalties due for the last 3 years for not making the correction timely after the plan year end for all 3 prior years.

The question might go away if he it is explained to him that he'd have to pay tax on the gains just the same as if they were sold. I suppose the motivation might be to save transaction fees but those fees should be minimal.

No such thing. We have plans that fail every year and take HCE refunds every year.

If you are submitting under VCP, ask for the moon and negotiate as needed with the IRS agent to find something that the employer can afford and that the IRS can agree with, something reasonable.