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Employer should find a way to help this employee outside the plan.

Not a mistake in fact

Mistake of fact is usually a minor typographical or arithmetic error. If they meant to put in $10,000 and but typed an extra zero by accident, that would be one thing. But I would have a hard time believing they didn't notice $90,000 missing for over 8 months! Check the plan document. I bet it says that the contributions will be allocated to participants.

I agree with ERISApedia and Who's the Employer. Your group of employees who satisfied the maximum age and service conditions of 410(a) will satisfy ADP by way of the safe harbor contribution. Your non-410(a) group will be subject to the ADP test; even though some employees in that group are receiving safe harbor contributions, it does not satisfy the ADP safe harbor because not all employees in that group who are eligible to defer are getting them. Hopefully all of your otherwise excludables are NHCEs, so testing that group will be satisfied easily.

Based on the letter of the law, assuming the plan uses the safe harbor rules, I'd say no. She is not purchasing a principal residence. Nor are moving expenses listed. Does the employer not provide moving expenses?

Exactly - so no deduction, but could do VAT up to 415 limit, do an in-plan Roth conversion (plan document needs to have Roth provisions) and then voila, you have your back-door Roth that everyone seems to be clamoring for these days. This is one of the rare instances it works (owner/HCE only plans). And at age 42, I would say there is certainly value for the owner in Roth.