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They are claiming he isn't an employee by putting him on a 1099. So he can't be treated as an employee for plan purposes and isn't on the tests.

Assuming the employee is a NHC, this can be corrected by a retroactive plan amendment. See Revenue Procedure 2021-30, Appendix B, Section 2.07(4)

An excerpt from IRS Notice 2018-95 - and short answer is that in your example, you can exclude them under the "20 hour" exclusion. Emphasis is mine. The provision imposes three separate conditions for an employee to be excluded from making elective deferrals under the part-time exclusion: (1) a “first-year” exclusion condition, (2) a “preceding-year” exclusion condition, and (3) the OIAI (“Once In Always In”) exclusion condition. Under the first-year exclusion condition, in order to exclude the employee from making elective deferrals, the employer must reasonably expect the employee to work fewer than 1,000 hours during the employee’s first year of employment. Under the preceding-year exclusion condition, in order to exclude the employee from making elective deferrals in an exclusion year ending after the first year of employment, the employee must have actually worked fewer than 1,000 hours in the preceding 12-month period.

The instructions state "Do not complete [Schedule A] if filing the Form 5500-SF instead of the Form 5500." This is located in the footnotes under the chart instructing you what schedules to complete based on what type of plan you are filing for.

Lou: If you fail the BRF (and catch it within 9½ months after year end), then you can probably extend Roth availability to enough NHCEs to pass the BRF test prospectively and it is treated as correcting the BRF failure for the plan year you are testing. That's the way most BRF corrections work with the prominent exception of an available match rate failure which requires some corrective contributions. It still might not make good plan design sense, but you and I aren't close enough to the original poster's situation to evaluate that.

No such thing - he is either an employee and paid via W-2 (or if has ownership then possibly K-1) or an independent contractor paid via 1099 in which case he is not eligible for any portion of the qualified plans. Notwithstanding, if IRS or DOL subsequently rules this person is a common-law employee and not a contractor based on facts and circumstances, then you might need to include in testing even if the terms of the plan continue to allow for his exclusion from participation. If he is and continues to be above HCE threshold that is unlikely to cause a problem.

He isn't. Give it back, all of it, it is a mistake in fact.

As far as I am concerned when it comes to 8955-SSAs follow the saying: when in doubt D If you aren't sure the person was reported on a prior 8955-SSA report them as a D if they meet the criteria. The fear people come back with is: well if I report a D that wasn't an A won't we be admitting we failed to report an A and the IRS will.... I have NEVER seen that. On the other hand you can search Benefitslink for all kinds of threads where someone got the letter and demanded the plan prove they were paid. If you read the rules carefully the plan is supposed to keep enough records to prove that forever. It happens a lot with a change of TPAs but it is the plan admin/sponsor's job to keep the records not the TPA's. In short I have never seen any downside "when in doubt D" but I have seen people spend a ton of non-billable hours trying to figure out if a person has been paid to their satisfaction. Yes, most people who get those letters accept the plan saying, "we shown you aren't due any benefits" but you get the hard cases now and then.

We've done this often. You have to have some cash. Estimate the amounts, transfer in-kind, and even things out with cash after you know the actual values transferred.

A plan (including a component plan) passes the coverage test if it benefits no highly compensated employees for the plan year. 1.410(b)-2(b)(6)

Close Luke....one more section and you would have found it. ERISA § 104(a)(1)

I'd say it all goes to suspense, contributions and earnings. Company already contributed it, just mis-allocated it.