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It's possible, but unlikely, that what he is doing is fine. Does he (or his spouse) have earned income or W-2 compensation other than his pension? Have the deposits to the IRA been less than the annual IRA limit and less than or equal to his earned income? Are the deposits to his wife's IRA - spousal IRA contributions? Were they both under age 70 1/2 in the year's this was done? Did he treat the pension payments as taxable income in the year received and the deposits as ROTH-IRA contributions? Is their income below then amount for making eligible ROTH-IRA contributions? If the answer to all of the above question are "yes" then he's probably fine. Otherwise, it sounds like he has Excess IRA Contributions for each year he has done this for himself and his wife. Excess IRA contributions are subject to a 6% excess tax each year they remain in the IRA.

Yes, 81-105 and the 1983 proposed regs are still in effect. Shout out to Derrin Watson's "Who's the Employer" which succinctly answers this and (I have not counted but probably) thousands of other questions.

I don't know about that. I honestly don't know if it is a flag. There are other reasons for not investing in real estate in a plan, starting with 1) valuation - what is it worth, each year? and 2) real estate often involves financing, which can trigger Unrelated Business Taxable Income, and 3) in small plans, owners often blur the lines between the plan and their personal investments, and don't understand that they can't buy/sell from/to themselves or a family member, or invest jointly with same, and otherwise gum things up by paying taxes and other expenses themselves when the plan should be paying, etc. etc. As you note, it is clearly "legal."

You follow the plan's terms to develop plan compensation. AOK to ignore loss if supported by plan documents. However, 415 comp includes all aggregated employers so that might end up forcing comp to be limited.

Jak, if you use "seasoned monies" for insurance premiums that exceed the incidental limits, those amounts are treated as a taxable distribution. That's why you get to exceed the incidental limits. I don't recommend it. Also, just an FYI even though you didn't ask, rollover monies are not considered in the calculation for the incidental limit since they weren't contributions to that plan.

But now you have the problem that participants were notified of the problem. Are they going to rescind the notice? "Hey, we screwed up your match, so we are gonna make it right." "On second thought, nope. Psych!"