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I was doing a little digging on a cafeteria plan issue and I came upon this paragraph: While cafeteria plans have much in common with their qualified retirement plan counterparts...there are significant differences. For example, failure to correct an administrative error in a qualified retirement plan could result in taxation of all future (otherwise deferred) benefits as well as a loss of exemption for trust earnings.... Cafeteria plans, on the other hand, by their very nature restart each year i.e., an administrative error should not affect prospective exclusions once correction is made. This is kind of a head-scratcher from my qualified plan perspective, where an error is an error until it's fixed. Does anyone have a cite for this restarting notion?

Yes, the government's position is that it is a contribution (testing problems? permitted by the plan document? in SPD?) unless there is a reasonable claim that there has been a breach of fiduciary duty (and who wants to admit that?)

Objective business criterion (I'm my opinion): Company A gets one match. Company B gets the other. Can't get more objective than that.

When you wrote that the plan is SH, do you mean that it satisfies the 401(k) safe harbor rules or that it satisfies both the 401(k) and the 401(m) safe harbor rules? It makes a difference here. The rule that no HCE can't have a better match rate available to him/her than a comparable NHCE will only apply to a 401(m) safe harbor plan. See Treas. Reg. Section 1.401(m)-3d)(4) and note that 1.401(k)-3(c)(4) doesn't apply when the safe harbor contribution is the 3% nonelective contribution, not the matching contributions.

How about amending the plan to name B as the sponsor, and then terminating A's participation?

It is my understanding that because elections must be made every year for Section 125 plans, the correction would be in that year only as the election doesn't carry forward. There are no balances to test, only elections vs wages, and pre-tax elections are tested within the year. And while a plan can have a very limited amount that can be carried over for FSA Medical only (or a short grace period where last year's elected $s can still be used), it is nothing like the amount that accrues in qualified retirement plans over many, many years with attached earnings. So there are no really ongoing future or deferred benefits after the end of the current plan year (NOTE: HSAs do NOT fall under this) So there are no trust earnings to be taxed should the Section 125 fail nondiscrimination testing. In the end, Section 125 plans do "restart" each year..... I know this isn't a "cite" but is a really good explanation of Section 125 and their "every year" issues: https://www.sullivan-benefits.com/wp-content/uploads/Section-125-Cafeteria-Plans-Overview.pdf