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IMO, no. These investments/tail-wagging the dog scenarios are almost always problematic.

The root cause for this scheme seems to be that the plan lacks cash available to give to the participant to make the loan. If so, then the scenario should start with the business making a cash contribution the plan sufficient to cover the MRC which would put the plan in the position to issue a loan check. That would provide a documented trail of the sequence of events. The idea of writing a check to himself is a stretch in an attempt to circumvent the lack of availability of cash in the plan. This supposes that there is $50,000 in the business checking account (for the contribution) that would cover a check to his personal bank account (for the loan). If there are not separate checking accounts, would a bank even cash a check from an account payable to the account upon which it is written? If the bank will not honor the check, is it a valid financial transaction? Trying to net the contribution and loan into a single transaction is vulnerable to an interpretation of events, and the IRS likely will have its own view of what transpired. Consider that the IRS could view the result of the net transaction as if the business funded the contribution by the having participant give the plan a promissory loan note secured by his vested balance in the plan, and then consider the potential consequences. @Lou S.'s suggestion to have a clear paper trail is on point. If the plan has the cash to make the loan, the paper trail should methodically step through the participant takes the loan, the participant makes the proceeds of the loan available to the business, and the business funds the MRC. If the plan does not have the cash to make the loan, the paper trail should include methodically step through the business funds the MRC, the participant takes the loan, and if necessary, the participant makes the proceeds of the loan available to the business. This is not advice of an kind, nor a recommendation. Frankly, this whole scenario has a whiff of a business in trouble and possibly with a plan that it cannot afford. Prudence would add taking steps to evaluate how assure the business and the plan can function within common norms.

It sounds like the owner just wants to skip some proper transactional steps and get the cash where it ultimately will end up, and just create a "memo" to document since there wouldn't be the transactional paper trail. I don't know how an IRS or DOL auditor might feel about that and do not think it's a good idea.

I'm with Bird, do the steps correctly to best protect the sponsor and plan, don't skip step because you think it gets you to the same spot. 1 Loan to participant in accordance with the Plan's loan program. 2 He can do want he wants with the money, including loaning it to the corporation. Let him work out those details with his CPA and or attorney. 3 Have the Plan Sponsor make the MRC (presumably $50K in this case). That way you have a clear paper trail should the IRS audit the plan.

Look for the term "Forfeiture Break in Service" in your plan document. That's what ours uses. After 5 Breaks in Service the non-vested funds are forfeited. I'd guess the first Break in Service was 2019. Forfeiture in 2024 is right on track.

Yes, you can drop COBRA at any point by simply not making the required premium payment.

Minor typo: An overspent FSA when dropping COBRA is just like an overspent FSA when terminating employment.

Do I know you? Looking at almost this exact same scenario. From my research, if the plan contains a loan provision, the participant can take a $50K loan from the plan (they will need to make payments on this). They can then loan that money to the plan sponsor (company/same person). The company can then use that cash to make the required contribution. On the surface, I don't see anything "wrong" with that, but it feels like there should be since the same $ are being deducted twice. My understanding is that the taxation might get ugly, especially if this is a pass-through or S-corp or something. Owner giving money to the corporation creates corp equity. The contribution is deductible. If paid within 5 years, no deemed distribution and no taxation on the loan to the participant owner. The Plan cannot loan the corporation money to make the MRC. In this case, the Plan is loaning the participant, who is loaning the company, who is making the contribution. My understanding is that if it's a pass-through entity, then there's no difference between owner and company, so this could be a problem depending on the structure.

I disagree with the TPA. An overspent FSA when dropping COBRA is just like an overspent FSA when terminating employment. The employer has no ability to recover that overspent amount. It's just part of the risk-shifting aspect inherent to the health FSA structure (uniform coverage risk of overspent balances against use-it-or-lose-it risk of forfeitures) that can always lead to net experience gains or losses. Employers cannot recover any amount from an employee who terminates employment mid-year with an overspent health FSA. That would risk disqualifying the entire Section 125 cafeteria plan, resulting in all elections becoming taxable to all employees. No different in the COBRA context. In short, the employee has used COBRA appropriately for the health FSA and has played his cards well. Just like if the employee had overspent the health FSA prior to termination (i.e., without the need for COBRA), the employer can't retro deny claims or do anything else to recover the overspent amount. Note that the situation is a bit more murky when it's an active employee who tries to make an election change the reduces the election below the current YTD reimbursements, but that's not the situation here. More details on that point here if you're interested: https://www.newfront.com/blog/overspent-health-fsa-upon-termination-of-employment-life-event-2 Prop. Treas. Reg. §1.125-5: (d) Uniform coverage rules applicable to health FSAs. (1) Uniform coverage throughout coverage period—in general. The maximum amount of reimbursement from a health FSA must be available at all times during the period of coverage (properly reduced as of any particular time for prior reimbursements for the same period of coverage). Thus, the maximum amount of reimbursement at any particular time during the period of coverage cannot relate to the amount that has been contributed to the FSA at any particular time prior to the end of the plan year. Similarly, the payment schedule for the required amount for coverage under a health FSA may not be based on the rate or amount of covered claims incurred during the coverage period. Employees’ salary reduction payments must not be accelerated based on employees’ incurred claims and reimbursements. IRS Chief Counsel Advice 201012060: https://www.irs.gov/pub/irs-wd/1012060.pdf The cafeteria plan rules require that a health FSA provide uniform coverage throughout the coverage period (which is the period when the employee is covered by the plan). See Proposed Treasury Regulations Section 1.125-5(d). Under the uniform coverage rules, the maximum amount of reimbursement from a health FSA must be available at all times during the coverage period. This means that the employee’s entire health FSA election is available from the first day of the plan year to reimburse qualified medical expenses incurred during the coverage period. The cafeteria plan may not, therefore, base its reimbursements to an employee on what that employee may have contributed up to any particular date, such as the date the employee is laid-off or terminated. Thus, if an employee’s reimbursements from the health FSA exceed his contributions to the health FSA at the time of lay-off or termination, the employer cannot recoup the difference from the employee.

Yes. Class specific match groups are written into plans all the time. Usually done only for regular match (not safe harbor or its variants). As long as testing (coverage, ACP etc) passes its fine.

Correct - there is a circular function to split the total earned income between ER Contribution and plan compensation. Assuming you need some amount of compensation to produce the benefit that is creating the contribution requirement, it w/b rare that the entire Sch C amount goes to deduction, but it is certainly possible if the high 3 is already established, or if you have a fixed dollar formula in a cash balance plan. This could easily create a 415 limit problem. There is also a special adjustment for 1/2 of the SE tax, and you have comp limits that can also come into play, so be careful.

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.