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To reclassify, some deferrals must exceed some plan or compliance limit. If the allocation of a plan matching or profit sharing causes a 415 excess then there is your basis for reclassification, right?

Technically speaking, can something be an "eligible rollover distribution" if it's not an eligible distribution in the first place? If the guy kept the cash, then that probably eliminates the potential to hold "your rollover is ineligible" over him, I suppose, in an effort to get the funds back.

I assume he hasn't filed taxes yet? Should be ok.

Piping in on the comment regarding Delinquent Filer Program . . . EZ filers have a separate program for failure to file called the "Penalty Relief Program." It's slightly less costly, but slightly more a pain in the neck because it's a paper filing. See Form 5500-EZ, Delinquent Filing Penalty Relief Frequently Asked Questions | Internal Revenue Service (irs.gov)

If the policy has been around for any length of time they should not have to pay premiums - let it APL (Automatic Premium Loan; confirm that is the default but it almost always is). Then at least you stop the bleeding while you figure out how to get rid of the policy.

Below Ground well said, we can only advise…and document. Whatever comments about plan design, or investments, including life insurance, are usually set up prudently and administered properly. However, something seems to happen from establishment to the time we get involved. Life insurance set up for a need as a survivor benefit and overseen and administered properly is a benefit welcomed by participants and beneficiaries (in my 25 plus years with experience dealing with life insurance in qualified plans I have never had a beneficiary complain about an income tax free death benefit, not have I had a client complain about an exit strategy). Good luck with this case.