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n-20-52.pdf Hot off the IRS press....

Any reason why the SMM can't function as the Notice, as long as it is given at least 30 days in advance, and the procedures for changing a deferral election are included?

The reporting is less about that code 1-or-2 point and more about whether the church plan’s administrator or withholding agent reports a distribution’s taxable amount. Some get a church’s designation of an amount of retirement pay that could be treated as an IRC § 107 parsonage allowance and information from the minister, and use those to report a taxable amount less than the gross distribution amount. But many find that the reporter is “unable to reasonably obtain the data needed to compute the taxable amount”, and mark box 2b as “taxable amount not determined”. The minister then reports on Form 1040 the amount the minister finds is the taxable portion of her distribution. It might not matter that a 1099-R displays a code that would alert the IRS to look for a too-early tax if the distribution’s taxable amount is $0.

Do the owners have earned income (LLC/parternship) or are they W-2 employees (corporation)? If it is a corporation, find their pay stubs and confirm if the amounts were actually withheld from their pay. If they were withheld, deposit the amounts now, with lost earnings, and pay the excise tax. If they were not withheld, amend the returns. If it is a partnership/LLC, so there are no W-2s to refer to, then you have to look at the partners' elections (the partners do make a written deferral election before the end of the year, right?). Then, same logic as before. If they elected to defer the amount but it was never deposited, deposit it now; if they did not elect to defer that amount, then amend the returns.