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Thank you, excellent! And leave it to the lead author of Governmental Plans Answer Book to have the answer.

Lets break it to separate points ignoring W2, since there is no information how W2 is related to his sole proprietorship: 1. Since you supported contribution amount with your BOY valuation, Schedule SB and the 5500 are correct to show contributions. 2. Since he had no Schedule C income, he could not deduct it. 3. So he needs to file the amended tax return that will show no contribution, which will result in additional tax with interest and possible penalties. This has nothing to do with his business account. 4. If he has personal funds to pay these additional taxes, you will not need any in-service distribution. 5. Having in-service distribution to pay taxes is the worst case scenario. The money were not deducted, but you will pay income taxes on in-service distribution. 6. And yes, any sole-proprietor should not make any DB contributions during the plan year, unless he is 200% certain, his net Schedule C income will cover the amount.

In your example if those are the only 2 participants in the plan and there are no other contributions in the ACP test then HCE ACP = 10%, NHCE ACP = 0% and 2 x 0 = 0 so you would refund 100% of the after tax contributions plus earnings. As to why you are getting a lot of questions, I think there was Wall Street Journal article about mega backdoor ROTH somewhat recently.

You mean he had W-2 comp? Not sure what kind of comp he received. You mean gives him a 1099 so he can file a Schedule C? If he received money and it was not W-2 income, then it should have been reported on a Schedule C whether he got a 1099 or not.

The client will only get taxed and penalized if she does not roll over the distribution. Have you spoken to the advisor who convinced her to start the plan in the first place? It sounds like the client just has cold feet about the plan; she might need some reassurance that everything is going to be ok, and the advisor (who she clearly trusts) might be the right person to do it.

VCP