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You can do what you want, but just remember you have to be comfortable defending your position on IRS Audit and I'm not sure the IRS would agree with your phantom contribution and phantom distribution approach even if from a tax perspective it comes out just the same.

The math works out but you can't simply net implied transactions - you don't have deposit to match contribution deduction and don't have a distribution to demonstrate RMD and justify a 1099R. I would not want to try to convince an IRS auditor that this is all OK because we get to the same place despite skipping the intermediate steps.

Because the law says it does. There is a specific rule - IRC 402A(c)(4)(E) - that says amounts transferred from a pre-tax account to a Roth account will be "treated as a distribution" which is why you can do this. There is no rule that says you can net your RMD against your planned contributions for the year and avoid taking a distribution if you contribute less. "Seems to" is not the same thing as "is." The main thing you're missing is that qualified plans have to have their assets in a trust, under the control of a trustee. Under your method, the trust never has control of the amount, so it can't be considered to be plan assets, so it can't be used to satisfy the RMD requirements. Your chart also seems to be saying that the $10,000 will simply remain in the business account. The RMD doesn't get paid to the business, it gets paid to the participant. The business would have to pay it out to the participant in that case, and there might be questions why a payment directly from the business to an employee isn't being treated as wages. If the goal is just to avoid making a payment out of the main plan account, what you might be able to do is to open a checking account in the name of the plan. Then deposit the $15,000 to that account, transfer $5,000 of it to the main plan account, and pay out the remaining $10,000 to the owner. That seems unnecessarily complicated to me, but maybe it will accomplish your aims.

If they want them in then I'd likely do 21/1 dual entry with eligibility waived for anyone employed on X date where X equals some date that brings in the 3 NHCEs.

No. What would justify the 1099? There was no distribution.

Overall, I agree with C.B. Zeller. I just wanted to add the following: 1. It is optional whether a plan will allow participants to self-certify hardships. 2. If the plan allows self-certification and the participant lies, generally there is no liability to the plan or its administrator merely by relying on the self-certification. 3. The exception to 2 is if the plan administrator is aware that the participant is lying, the self-certification cannot be relied upon. If the plan administrator nevertheless authorized the withdrawal, then the plan administrator is subject to liability by disregarding its actual knowledge by authorizing the distribution.

If you're talking about SECURE 2.0 sec. 312, it says "the administrator of the plan may rely on..." which implies that is is not mandatory. If the plan allows self-certifications and it later turns out that the employee lied about the hardship, I do not believe that there would be any penalty on the plan or on the plan administrator, unless the plan administrator had actual knowledge that the hardship did not exist and allowed the distribution anyway. That is what it means to "rely on" the self-certification. The law does say that the IRS may issue regulations addressing what happens if it turns out that the employee misrepresented their hardship. If the plan does not allow self-certification, and the plan administrator allows a distribution for a hardship which later turns out not to exist, then the plan faces disqualification.