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This is false. Misleading at best.

They are part of the total plan assets. There is no distinction between employee and other on the 5500.

One way to pass top heavy in a DB-DC combo plan is to increase to the 3% TH minimum in the DC plan to 5%. That is the significance of 5%. The maximum gate-way for cross testing a DB/DC combo is 7.5% (though it can be less depending on highest HCE allocation rate). That is the significance of 7.5%. Neither 5% nor 7.5% is a guarantee that the combined plan testing will pass 401(a)(4) but often it is depending on the demographics.

Why not have the new entity be an adopting employer than remove the old entity after it shuts down?

Agreed. Just tell him to make sure the entities overlap in existance.

He probably should, even, just to avoid the successor plan issue. If he's 100% owner of both entities they're clearly related.

I'm not a lawyer nor an accountant, but here is my layman's take. Paraphrasing the facts as I understand them: an IRA purchased a home/real estate as an investment, the IRA owner did not use such property (either rented or maybe planned to flip), but the now engaged IRA owner plans to live in the property at some future point (after marriage) and so the IRA needs to divest/sell this property. The contemplated buyer is not currently related to the IRA owner, so I see no issue with the transaction provided any other rules for such are satisfied. If this was a friend, a cousin, a stranger, would there be any issue? I don't think so. An engagement for marriage is not a legal status as far as I know - it does not guarantee that a marriage actually occurs, and some engagements last years while others dissolve. What if he/she was just a boy/girlfriend, they did the transaction and then decided to live together without getting married. Something of this magnitude should be steered to a qualified tax attorney, but this was my not legal opinion.

I do believe that the maximum Compensation limit for the year of $305,000 will need to be pro-rated for the short plan year period. If it is a non-Safe Harbor plan, this could effect the results of your testing.

No, the FSA cannot reimburse expenses incurred prior to the employee's period of coverage. In your example, that period of coverage does not begin until 11/1 when the employee becomes a participant. So only expenses incurred 11/1/22 - 12/31/22 are reimbursable in that example. Full details: https://www.newfront.com/blog/when-fsa-expenses-are-incurred General Rule: Expenses Must be Incurred in the Period of Coverage An FSA can reimburse only expenses incurred during the participant’s period of coverage. The period of coverage is the period of the FSA plan year in which the employee is enrolled (including any grace period for such plan year). This means that any expenses incurred before or after the employee’s FSA period of coverage are not reimbursable. Allowing an expense incurred outside the period of coverage to be reimbursed by the FSA would be a plan operational failure. The Section 125 regulations provide that operational failures can result in the entire Section 125 cafeteria plan being disqualified if discovered by the IRS—which would result in all cafeteria plan elections becoming taxable for all employees. Example 1: Tim incurs $240 in glasses expenses in March 2020. Tim changes jobs and is a new hire with a new employer in May 2020. The new employer maintains a calendar plan year health FSA. Tim enrolls in the health FSA, making a $1,000 election for coverage beginning June 2020 through the end of the plan year. Result 1: Tim’s March 2020 glasses expenses are not reimbursable under the FSA because the expenses were incurred prior to his period of coverage. Only health expenses incurred from June through December 2020 (plus any associated grace period) are within his period of coverage for the 2020 plan year. ... Regulations Prop. Treas. Reg. §1.125-5(a)(1): (a) Definition of flexible spending arrangement. (1) In general. In general. An FSA generally is a benefit program that provides employees with coverage which reimburses specified, incurred expenses (subject to reimbursement maximums and any other reasonable conditions). An expense for qualified benefits must not be reimbursed from the FSA unless it is incurred during a period of coverage. See paragraph (e) of this section. After an expense for a qualified benefit has been incurred, the expense must first be substantiated before the expense is reimbursed. See paragraphs (a) through (f) in §1.125-6. Prop. Treas. Reg. §1.125-6(a)(2): (2) Expenses incurred. (i) Employees’ medical expenses must be incurred during the period of coverage. In order for reimbursements to be excludible from gross income under section 105(b), the medical expenses reimbursed by an accident and health plan elected through a cafeteria plan must be incurred during the period when the participant is covered by the accident and health plan. A participant’s period of coverage includes COBRA coverage. See §54.4980B-2 of this chapter. Medical expenses incurred before the later of the effective date of the plan and the date the employee is enrolled in the plan are not incurred during the period for which the employee is covered by the plan. However, the actual reimbursement of covered medical care expenses may be made after the applicable period of coverage. (ii) When medical expenses are incurred. For purposes of this rule, medical expenses are incurred when the employee (or the employee’s spouse or dependents) is provided with the medical care that gives rise to the medical expenses, and not when the employee is formally billed, charged for, or pays for the medical care.