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You can use statutory exclusions of 21 & 1 with dual entry for testing if that's what you are asking.

If it's offered, then you do have to offer it to all. But it's not a protected benefit so you don't have to offer it forever. Get the current people to sign off on not wanting insurance and then amend it out for future offering.

I think you could have stopped offering it as an option years ago. But, as you said, most people don't do this purchase in their plans anymore. Typically, the policies would have been purchased, paid for 5-8 years and then sold out of the plan. If they didn't do that, they probably didn't think it through OR the agent didn't care about the plan to begin with. At some point, assuming the guy retires, the policy will have to be surrendered or he'll have to buy it out. Is there any good reason to keep the policy in place any longer? If not, surrender it and put everyone out of their misery.

This is indeed important detail. I triple down on my suggestion that the Plan Administrator hire counsel. Bad advice was given, bad advice was taken, and bad advice led to unfortunate consequences - for the granddaughter, for the son, for the Plan Administrator, for the plan sponsor, and perhaps for the 3rd party advisor. We cannot resolve those issues here...

An actuary is a person who, after reading this quip, checked to make sure the "once every 17 years" calculation is correct.

That's a key detail. I still find that language unusual, but it seems to clearly state that the granddaughter was entitled to half. I think they have to try to get half back from the son - good luck with that. I'm always curious about these types of posts - what is your role here?

Has is occured to anyone to ask the person who posted the message what "IRS regulations state that grandchildren are not eligible to receive distributions"? I for one would be interested in that. Most 401(k) Plans that I have seen have an "order of preference" that would apply in the case of a participant who dies without having named a beneficiary. I would look something like this: 1. To your widow or widower. 2. If none, to your child or children equally, and descendants of deceased children by representation. 3. If none, to your parents equally or to the surviving parent. 4. If none, to the appointed executor or administrator of your estate. 5. If none, to your next of kin who is entitled to your estate under the laws of the state in which you resided at the time of your death. In the absense of an order of preference the account would pass to the estate of the deceased participant and be distributed pursuant to state law that applies when the deceased party dies intestate. DSG

Yes. https://www.federalregister.gov/documents/2019/09/23/2019-20511/hardship-distributions-of-elective-contributions-qualified-matching-contributions-qualified

The 2023 instructions to the Form 5500 page 3 includes the following definition: Pension Benefit Plan All pension benefit plans covered by ERISA must file an annual return/report except as provided in this section. The return/ report must be filed whether or not the plan is “tax-qualified,” benefits no longer accrue, contributions were not made this plan year, or contributions are no longer made. Pension benefit plans required to file include both defined benefit plans and defined contribution plans. The following are among the pension benefit plans for which a return/report must be filed. 1. Profit-sharing plans, stock bonus plans, money purchase plans, 401(k) plans, etc. ... For purposes of the Form 5500, the term pension is used to distinguish a retirement plan from a welfare benefit plan.

Under a Treasury rule, a payment a fiduciary makes (and uniformly applies regarding all similarly situated participants) when the fiduciary faces “a reasonable risk of liability” might be a restorative payment, treated as not an annual addition. 26 C.F.R. § 1.415(c)-1(b)(2)(ii)(C) https://www.ecfr.gov/current/title-26/part-1/section-1.415(c)-1#p-1.415(c)-1(b)(2)(ii)(C). A fiduciary’s breach need not be proven or conceded; it is enough that there is “a reasonable risk of liability[.]” (The rule is wider than the earlier Revenue Ruling. And a rule is more reliable than nonrule guidance.) Even if all related decisions were proper and prudent, selecting a stable-value contract or deciding to make it a designated investment alternative (or continuing either decision) might have been a breach (or might set up facts allowing a complaint plausibly to assert a breach) if the fiduciary then knew—or had it exercised the care, skill, prudence, and diligence then required, would have known—that there was more than a remote possibility that the business would be acquired, or even that an owner might seek to sell the business. (One might presume a prudent fiduciary knows that a careful business acquirer typically requires the target to end its retirement plan before closing.) Or, if the plan’s fiduciary finds there is no “reasonable risk of liability” and that the adjustment is an annual addition, allocations of the adjustment might fit within all or most participants’ annual-additions limit ($69,000 [2024]) and might comport with coverage and nondiscrimination conditions. Either way, be careful if the restoration or adjustment disproportionately favors highly-compensated employees or affects a decision-maker’s individual account.

The individual should continue to have a balance -- you can't simply take that away. But as to future participation, I agree with @CuseFan.

The IRS gave some guidance on this topic in Rev. Rul. 2002-45 (https://www.irs.gov/pub/irs-drop/rr-02-45.pdf). The question comes down to whether the fiduciary reasonably determines that there is reasonable risk of liability for a fiduciary breach as a result of the surrender fee/MVA. From 02-45: I cannot make that determination for you or the plan, but the fiduciary's justification (or lack thereof) for purchasing the SVF with the MVA, the facts that gave rise to the change (i.e., an unanticipated merger), and the participant's opinions regarding the MVA would weigh into that decision.

Governmental? - I'd say it depends on what the plan ultimately says concerning that situation, and if it hasn't happened yet, a good opportunity to consult and make sure that it does address the situation. Tax-exempt top-hat? - Same as above UNLESS the change concerns who the employer is considering as select management or highly compensated, in which case the employee should no longer participate if the employer deems no longer a top-hat eligible employee.

I think this has come up previously in the case of surrender charges (which are similar but not the same). I believe if the restorative payment was to forestall an actual or potential fiduciary lawsuit then it would not be counted as a contribution to the plan subject to all the conditions of an employer contribution. But I do not have any specific cases I can point you to (perhaps someone in the investment arena on the legal side can provide some for you to look at) and do not know if it extends from the surrender charge to MVA analogy.