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Yes, you need to have a detailed conversation with the client. Plan sponsors say things incorrectly all the time using retirement plan terminology that they do not understand. I still have many a client that refers to their safe harbor non-elective and/or profit sharing in their 401(k) plan as a match. The only thing that comes to mind for this is quarterly vesting computation periods, for example, you vest 5% for 250+ hours in a quarter rather than 20% for 1000+ hours in a year? Doubt pre-approved plan has specific accommodation, don't know if such a modification would cause it to lose reliance. Regardless, I think you would have to have a 1000 hour annual vesting provision override, so if someone was +250 for only three quarters but still +1000 for the year, they would have to vest 20% rather than 15%. Interesting concept if that's what they're thinking, but have fun administering!

One more play: Did you read the forms the participant signed (whether in ink, or electronically) when she claimed the hardship distribution? Some recordkeepers design those forms to include the claimant’s assent to her responsibility to resume deferrals.

Just amend to SF. Get a bond going forward. And/or do a current amendment to preclude the kid's participation.

I agree with Peter that the obvious answer is simply to file the 5500-SF for the applicable years as soon as possible. The delinquent filer fee is capped at a very reasonable amount. If, for some reason, that is not an option, you might also consider: PPA sec. 1103 amended the definition of "one-participant plan" to include a plan that covers only 2% shareholders in an S-corporation, including attribution. This change was not reflected in the instructions to the 5500-EZ until the 2020 plan year (as Jakyasar noted). If the entity sponsoring the plan is an S-corp, and the years in question do not predate the effective date of sec. 1103 of PPA, then the plan sponsor, if they found themselves under investigation by the government, might claim that they were interpreting the definition of "one-participant plan" under the changes made by PPA. If the plan sponsor decided at some point not to allow the son to participate in the plan, they might have memorialized that decision somehow, possibly by a formal resolution, or a note scribbled on a cocktail napkin, or something in between. Depending on the circumstances, that could have the effect of closing the plan to new entrants, including the son. If the plan was later restated but without the participation freeze, you might see if it would be possible (for example, under EPCRS) to retroactively amend the plan to conform it to operation.

EPCRS allows the participant in the plan to re-amortize the loan over the balance of the five year period. There is no need to report this as a deemed distribution. [EPCRS §6.07(3)(d)]

If initial term was 5 years then I think re-amortizing is needed. If it was say 4 years and starting now completes payoff within the max 5 years then that might be OK. Or the employer could make the lump sum catch-up, but I think would have to include such in employee's taxable compensation.

Since the mid-1980s, many people (including many with no lawyer) have proposed such a sentence in the text of the court’s order. Why? It might help support a plan administrator’s finding that an order “is made pursuant to a State domestic relations law[.]” It might help meet an element on a QDRO administrator’s checklist. (An absence of such a sentence might result in a kick-out to read the order and, in some circumstances, consider context information or relevant law to discern whether the order was made under domestic-relations law.) The sentence is especially helpful if the issuing court’s jurisdiction is not restricted to domestic-relations matters and the order’s text does not mention (as it often might not) the claim that was grounds for the court’s order. Some plans’ administrators might accept without question a judge’s finding that the order was made under domestic-relations law, unless the administrator knows the finding is obviously wrong.

Satisfies. The statement itself is not even necessary in the order, but it is a nice touch.