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Assuming he's 100% vested (same really applies if less), then typically he would get 100% of whatever was in the account when it was liquidated and sent. So he did get earnings whenever it was processed. And I don't believe that the brokerage firm wasn't able to see what the participant was invested in at the time. Not that it really matters, but they're saying they can't run a report from X date to liquidation? Please.

If the plan document allows for such (or is amended for such).

I would save all documentation, and then do a typical missing participant search. The plan/plan sponsor/plan administrator hopefully has an administrative procedure for such and if not, now would also be a good time to develop one.

Here is an analysis of Top Heavy plans done by the GAO in 2000 that provides explores the pros, cons, and practical considerations surrounding top heavy rules. On balance, the rules are accomplishing the goal of having owners who derive substantial tax benefits from their company needing to provide a level of access to retirement income on behalf of the company's employees. The trend in recent legislation has been to provide more lower cost avenues for owners to do so. From a technical standpoint, the Top-Heavy Innoculation Exclusion sounds plausible. From practical standpoint, it is a disaster that is waiting to happen. The greatest risk is operational compliance, particularly when the people performing HR, payroll and benefits functions at the company are making daily decisions about who is in or out of the plan. The Exclusion does not have a plausible corrective action in the event of an operational failure other than to make the top heavy contribution. IMHO, we can play knight-errant and tilt at windmills, but it is our clients that suffer the consequences when facts and circumstances result in this approach fails to live up to its guarantee. “Top-Heavy” Rules for Owner Dominated Plans.pdf

In general, I agree with your sentiment. However, for an owner-only plan the situation is different. There are no effective availability issues, no operational failures, and no fiduciary concerns, etc. Since the owner is the participant, it really is a just a plan where the participant(s) has elected to not defer, as opposed to a plan where the employer decided to not facilitate, implement, or promote to the employees a plan feature the employer agreed upon when adopting the plan document. In short, I'd suggest that the document include the delayed special effective date for deferrals, but IMO, it is not a hill to die upon.

The required contribution might be more than the Schedule C income, but deduction is limited by the Sch C. Normally you'd have a non-deductible contribution subject to the excise tax but the excise tax is waived for a Sole Prop whose MRC would drive his income negative but you still have a non-deductible contribution to the Plan.

You do know they were written because small closely held business setup plans that gave generous benefits to owners with no benefit to rank and file prior to the advent of §416. If they don't want to make any employer contribution ever I believe they could set up salary deferral IRAs and not have to worry about the TH rules.

Not all self employed, only sole proprietors. And it was not IRS, it was Congress, in SECURE 2.0.

I'm a little confused if the distribution is still in his individual account didn't he get the gain/(loss) by the funds remaining in his account? Or were the funds liquidated but he never got the check which may or may not have been sent to him? If it's the former then I don't see that he has much of a claim, if it's the later the fund house is likely to simply stop payment on the original check and reissue likely without earnings.

Yes, it's allowed but I think it must be done (plan adopted and deferrals made) by the unextended tax return due date. I believe that's the rule, someone will correct me if I'm wrong. Here is an article stating such. I don't usually rely on Ascensus for technical issues but this agrees with my understanding. https://www.ascensus.com/industry-regulatory-news/news-articles/retroactive-first-year-elective-deferrals-for-sole-proprietors/

This may also be helpful re: the TINs.... EY Tax Alerts Employers receiving nameTIN mismatches during.pdf

I agree with you about their not being able to see what he was invested in. 😂 Thanks Bill! I appreciate your replies.

Unfortunately, that is a textbooks example of why prior year testing for the ACP test is generally a very bad option. What does your plan document say (the relevant language is likely in the BPD)? The pre-approved documents I know provide that the 3% is based on the first plan year in which the plan "provides for" matching contributions (see Treas. Reg. §1.401(m)-2(c)(2)). Effectively, the question is: when was the 401(m) plan adopted? The 3% rule exists because you can't have an ACP or ADP for the year prior to the adoption of the plan. IMO, by adopting a discretionary match, the plan "provided for" a match and created the 401(m) plan in 2022. The fact the employer elected not to make a discretionary match just means that they had a 2022 ACP of 0% - and fell into the trap associated with using prior testing for the ACP test. The plan would likely be much better served by amending to use current year testing for ACP; they can remain on prior year for ADP (but it is too late for 2023).

The spouse's general purpose health FSA was unfortunately disqualifying coverage for both the spouse and you. I've copied the relevant cite below for reference. Here's an overview: https://www.newfront.com/blog/hsa-interaction-health-fsa-2 So you will need to have the HSA custodian process the corrective distribution. That will avoid a 6% excise tax that would otherwise apply for the excess contributions. You should just be able to tell the custodian you had disqualifying coverage without the need to argue over the finer points of the HSA eligibility rules here. Here's an overview: https://www.newfront.com/blog/correcting-excess-hsa-contributions IRS Notice 2005-86: https://www.irs.gov/pub/irs-drop/n-05-86.pdf Interaction Between HSAs and Health FSAs Section 223(a) allows a deduction for contributions to an HSA for an “eligible individual” for any month during the taxable year. An “eligible individual” is defined in § 223(c)(1)(A) and means, in general, with respect to any month, any individual who is covered under an HDHP on the first day of such month and is not, while covered under an HDHP, “covered under any health plan which is not a high-deductible health plan, and which provides coverage for any benefit which is covered under the high-deductible health plan.” In addition to coverage under an HDHP, § 223(c)(1)(B) provides that an eligible individual may have disregarded coverage, including “permitted insurance” and “permitted coverage.” Section 223(c)(2)(C) also provides a safe harbor for the absence of a preventive care deductible. See Notice 2004-23, 2004-1 C.B. 725. Therefore, under § 223, an individual who is eligible to contribute to an HSA must be covered by a health plan that is an HDHP, and may also have permitted insurance, permitted coverage and preventive care, but no other coverage. A health FSA that reimburses all qualified § 213(d) medical expenses without other restrictions is a health plan that constitutes other coverage. Consequently, an individual who is covered by a health FSA that pays or reimburses all qualified medical expenses is not an eligible individual for purposes of making contributions to an HSA. This result is the same even if the individual is covered by a health FSA sponsored by a spouse’s employer. Slide summary: 2024 Newfront Go All the Way with HSA Guide

You make them a participant by accepting the rollover, so I would argue that "not a participant as of EOY" is incorrect. They are a participant who has not met eligibility for contributions other than rollover.