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Back to the original question: since it's a PSP and since it allocates to all participants, you should not only take the money out of the non-participant's account but reallocate it to the others, as it should have been allocated to begin with. I would imagine that any "bad blood" that the terminated employee would spread could be tempered by a notice from the employer that says, "We accidentally include Nasty Guy in the plan when he wasn't eligible. Pursuant to IRS-prescribed procedures, we've taken the money out of his account and given it to you guys, which is where it belongs." Just sayin'.....

Well the "best way" to handle it is to get the carrier to issue corrected 1099-Rs in the name of the participant instead of the company.

Assuming that you are just simplifying for the purposes of this discussion - since the net earned income calc is a little more involved than just earned income minus plan contributions - then yes, you are correct. The contribution will reduce net earned income, which will reduce the high-3 average comp for 415. If this is the sponsor's only plan, then you can use the $10,000 de minimis 415 limit (prorated for years of service), which is not much, but it's better than $1,000.

And I found it in the BPD. (Not sure how I missed it the first time...) (ii) shall be made, as operationally determined by the Administrator, from the Participant's Pre-Tax Elective Deferral Account or the Participant's Roth Elective Deferral Account, to the extent both Pre-Tax Elective Deferrals and Roth Elective Deferrals were made for the Plan Year;

Nope, by certified I just mean something in writing from the client giving the salary amounts (e-mail, letter, whatever). The fact that they give us salary and hours (if applicable) in writing is sufficient for our purposes - it pretty well "certifies" that they are actually working there. As opposed to a phone call where we write it down. Just to cover our posterior...

I'm not sure I follow your question. A 401(k) plan has to pass the Average Deferral Percentage test (ADP) on 401(k) deferrals and the Average Contribution Percentage Test (ACP), if there are matching contributions. A safe harbor plan is exempt from the ADP (and ACP) tests if it meets certain requirements spelled out in the code. Are you the Sponsor, Financial Advisor or TPA?

Solo 401(k) is just a marketing term for a 401(k) plan that is supposed to cover just owner and spouse. Safe Harbor 401(k) is just a 401(k) with Safe Harbor provisions of either matching or non-elective contributions that meet certain conditions to get out of 401(k) testing and possibly top-heavy. Both are simply subsets of regular 401(k) Plans. There is no reason why the "Solo (k)" and be restated on to a different document and you could possibly restate it to a safe harbor 401(k) Plan for 2022 is they are OK with a non-elective safe harbor; the matching safe harbor you could not do until 2023 at this point.

Will the client consider going unbundled? That would likely solve a lot of the issues they are experiencing. In regards to Guideline's advice - I don't see why it wouldn't be able to restate the current document, effective 1/1/2022. Then, they can amend as needed for 2023. This new hire wont be eligible until 2023, anyway, correct? Guideline is referring to the successor plan rules, which prohibit a Plan Sponsor from terminating a plan with deferrals or Safe Harbor funds and establishing a new Plan within 12 months of distribution. I don't see why the Plan needs to be terminated if it's a normal 401(k) Plan. Guideline can restate effective 1/1/22 and then amend to add Safe Harbor (or whatever they deem necessary) effective 1/1/2023.

yes, if HCE at time of separation.

As it stands, you have a qualification failure because the plan document (which says he wasn't eligible) doesn't agree with the plan's operations (since he received a contribution). If you do nothing, this operational failure will jeopardize the tax-qualified status of the plan. The IRS provides two ways to fix the failure and restore the plan's qualified status: Change the document to match operations, that is, adopt a retroactive amendment to allow this person to enter the plan earlier than they otherwise would have, and the contribution will remain in their account; or Change the operation to match the document, which would mean pulling the money out of this person's account. Rules for both of these options can be found in the most recent version of EPCRS, rev. proc. 2021-30.

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)

You have to take it away. If you read the document closely it will have a provision telling you what happens if a person is given a contribution in error and I can't imagine it says anything but take it away. Read the document closely I am sure that provision is in there and what it says. If you are using a prototype it will be in the base document. Failure to fix is a failure to follow the document which can disqualify the plan. Maybe one of the lawyers that come by here can tell you if you can do some kind of correction that allows you to amend the plan document to fix this. But my guess is if you can do this the change won't be worth it. I seem to recall it might be possible to change the eligibility for everyone to something short enough to allow this person into the plan but that would mean you would have to do it for everyone.