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It sounds like they had restated to their document rather than Schwab's, so it would be one plan document and two custodians.

With only 1 year of accrual, how large can the lump sum be? Vesting to 100% couldn't be excessive, I would think... but would be the "safest", especially if a potential qualification issue arises.

The presumption by the IRS is that you had a more than 20% reduction in eligible participants and a partial termination occurred, the result of which is 100% vesting of the affected participants. However this is not a bright light test, but rather a facts and circumstance determination whether or not a partial termination occurred. You might be able to argue why a partial termination did not occur. Evidence of a voluntary termination on the part of the participant might be helpful to your case that a partial termination did not occur. As to why he should be "forced" the IRS doesn't write the rules with small plans in mind generally. If a partial termination did occur and the participant benefit was forfeited when it should have been 100% vested you have a potential plan qualification issue.

Open other brokerage account for ee with any other provider besides Schwab or Fidelity.

If the final 1099 form includes the extra 1900, then I think you're fine in showing everything "really" out by 12/31.

Although it would be great if plan documents and/or written procedures dealt with this up front (and many do), I don't think it would be a plan failure to withhold taxes and amounts that had been elected, e.g. health plan contributions, before 401(k). The 401(k) plan is just one claimant among several others with lawful claims on the paycheck, e.g. Uncle Sam for FITW and FICA, state tax withholding, short-term disability, health plan, cafeteria plan. They all have legal claims on the money and the precedence among them should be based on the employer's reasonable triage of these claims, which would probably put the 401(k) plan last. You will probably want to amend the document pronto, however, if it can be read not to allow such flexibility, but I have never seen a plan document that would put deferrals ahead of taxes or other lawful claims. At worst, the wording is simply oblivious to this foreseeable practical issue. To paraphrase someone's statement regarding the Constitution (think if was Marshall), "It's a 401(k) plan, not a suicide pact."

The client is correct - you do not have to file 5500-EZ if the assets are below $250,000, even if you filed in the previous year (unless it's the final year of the plan). However, you are inviting a contact from the IRS by not filing. They won't be able to assess any penalties, since the filing was not required. But it's easy to file, so why not go ahead and do it anyway?

You'll always need a Schedule SB for the contribution year, signed and delivered to the Plan Sponsor. If it's an EZ the SB isn't filed with IRS but is maintained and subject to audit. If it's adopted in 2022 for 2021 under the SECURE Act your first required filing is 2022 Plan year (assuming you are over $250K) in which case you attach the 2021 and 2022 SB to the 2022 filing but if it's an EZ you don't attach the SBs. In your last example, it would depend if you are filing on a cash basis or accrual basis whether or not you are over $250,000 for the 2022 plan year for purposes of required EZ.

But then the plan would be operating under two separate plan documents. If using another provider, better to move all assets under the plan to that provide and plan document.