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"So you are not providing the facts necessary for us to understand what happened. More details are necessary including the exact name of the Plan." I agree that the necessary details are missing. HOWEVER, the exact name of the plan is not one of them and should not be published under these circumstances on a Discussion forum.

Isn't this your answer right here? That is the Plan does not allow it. If the Plan allows for partial distributions the amount above the RMD is subject to 20% withholding assuming it is eligible for rollover. As for taxes owed it would be ordinary income but since it is a death benefit distribution it would not be subject to the 10% penalty on early distribution regardless of the beneficiaries age. I would assume beneficiary could take the whole account and could probably roll to Inherited-IRA.

My only issue would be to ask why didn't forfeiture happen when the 5 BIS happen? That has got to be the latest date the document would have said it ought to have happened. So you had a failure to follow the document in my mind back in the 2009-2020 time frame if this person termed in 2004. Had the document been followed this question wouldn't have even come up. I would recommend at least make sure your firm's procedures look for people who ought to forfeit when the document says even if they aren't paid for all clients.

The "normal" use of the one year/1000 hours is that it requires BOTH the completion of a year (12 months) AND having at least 1000 hours. At that point, the person has met the eligibility provisions and now has to meet the entry requirements, which would normally be the next following or coincident semi annual entry dates. That combination allows us to keep out participants as long as legally permissible. Now, insurance companies and brokerage firms are notorious for wanting to have provisions that bring people in faster (because that's how they make more money by having more assets to manage), so you do need to confirm the exact language that your plan uses in this case.