Peter Gulia

Everyone has made excellent points. 
Even if allowed(very doubtful) - consider the additional expenses of a periodic independent appraisal for valuation to report correct as a plan asset, as well as the expense of an ERISA bond covering a non-qualifying asset. Is the plan or employer willing to pay those expenses?
 

Many plan sponsors design one’s plan to follow this:
26 C.F.R. § 1.401(k)-1(d)(3)(ii)(B) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(d)(3)(ii)(B).
Of the seven situations deemed an immediate and heavy financial need, EBP’s paraphrases are of –(B)(2) and –(B)(4).

@Peter GuliaI understand that service provider encompasses a broader group than just employee.  I simply meant that the dynamics of determining advisee/advisor issues can be extremely different depending on the character of the service provider.  if advising a company regarding an individual employee and the tax consequences under 409A, one often notes the adverse tax consequences, at least at this time, are almost entirely on the employee.  In which case, the employer might take a riskier path than another.  The dynamics change drastically if you tell the same company client the adverse tax consequence would land on the directors even if you have language stating the company doesn't guarantee any tax consequences and has no liability, etc..  That's all I was saying.  

Thoughts about other ways:
If the plan allows participant loans, might this participant prefer to borrow a needed amount, with an opportunity to repay over five years?
If the plan provides (or might be amended to provide) a § 72(t)(2)(I) emergency personal expense distribution, might that be a partial fit for the participant’s needs? A distribution can be “for purposes of meeting . . . immediate financial needs relating to necessary personal or family emergency expenses.” I.R.C. (26 U.S.C.) § 72(t)(2)(I)(iv). Practically, this distribution is almost standardless, especially if the plan provides it on a participant’s self-certifying claim. Although $1,000 might be much less than the participant needs, it might be better than nothing. I.R.C. (26 U.S.C.) § 72(t)(2)(I) https://www.govinfo.gov/content/pkg/USCODE-2023-title26/html/USCODE-2023-title26-subtitleA-chap1-subchapB-partII-sec72.htm.
This is not advice to anyone.

On Santo Gold’s hypo, isn’t the account balance after the first loan is made still $50,000—that is, $25,000 participant loan receivable + $25,000 other investments?
But wouldn’t ERISA § 408(b)(1) and Internal Revenue Code § 72(p)(2)(A) limit the amount for a second loan?
Consider 29 C.F.R. § 2550.408b-1(f)(2)(i) https://www.ecfr.gov/current/title-29/section-2550.408b-1.
Consider 26 C.F.R. § 1.72(p)-1/Q&A-20 https://www.ecfr.gov/current/title-26/section-1.72(p)-1.
Even before applying the tax Code limits, ERISA § 408(b)(1) limits the outstanding balance of all loans to the participant to more than half the participant’s vested account (measured after the origination of each loan).
On Santo Gold’s hypo, if the participant when applying for a second loan has not yet repaid anything on the first loan, isn’t the second loan $0?

For a reader who might explore the uses, here’s Internal Revenue Code § 401(b)(3) (as compiled in the United States Code):
(3) Retroactive plan amendments that increase benefit accruals
If—
(A) an employer amends a stock bonus, pension, profit-sharing, or annuity plan to increase benefits accrued under the plan effective as of any date during the immediately preceding plan year (other than increasing the amount of matching contributions (as defined in subsection (m)(4)(A))),
(B) such amendment would not otherwise cause the plan to fail to meet any of the requirements of this subchapter, and
(C) such amendment is adopted before the time prescribed by law for filing the return of the employer for the taxable year (including extensions thereof) which includes the date described in subparagraph (A),
the employer may elect to treat such amendment as having been adopted as of the last day of the plan year in which the amendment is effective.
I.R.C. (26 U.S.C.) § 401(b)(3) https://www.govinfo.gov/content/pkg/USCODE-2023-title26/html/USCODE-2023-title26-subtitleA-chap1-subchapD-partI-subpartA-sec401.htm.

For a reader who might explore the uses, here’s Internal Revenue Code § 401(b)(3) (as compiled in the United States Code):
(3) Retroactive plan amendments that increase benefit accruals
If—
(A) an employer amends a stock bonus, pension, profit-sharing, or annuity plan to increase benefits accrued under the plan effective as of any date during the immediately preceding plan year (other than increasing the amount of matching contributions (as defined in subsection (m)(4)(A))),
(B) such amendment would not otherwise cause the plan to fail to meet any of the requirements of this subchapter, and
(C) such amendment is adopted before the time prescribed by law for filing the return of the employer for the taxable year (including extensions thereof) which includes the date described in subparagraph (A),
the employer may elect to treat such amendment as having been adopted as of the last day of the plan year in which the amendment is effective.
I.R.C. (26 U.S.C.) § 401(b)(3) https://www.govinfo.gov/content/pkg/USCODE-2023-title26/html/USCODE-2023-title26-subtitleA-chap1-subchapD-partI-subpartA-sec401.htm.

On Santo Gold’s hypo, isn’t the account balance after the first loan is made still $50,000—that is, $25,000 participant loan receivable + $25,000 other investments?
But wouldn’t ERISA § 408(b)(1) and Internal Revenue Code § 72(p)(2)(A) limit the amount for a second loan?
Consider 29 C.F.R. § 2550.408b-1(f)(2)(i) https://www.ecfr.gov/current/title-29/section-2550.408b-1.
Consider 26 C.F.R. § 1.72(p)-1/Q&A-20 https://www.ecfr.gov/current/title-26/section-1.72(p)-1.
Even before applying the tax Code limits, ERISA § 408(b)(1) limits the outstanding balance of all loans to the participant to more than half the participant’s vested account (measured after the origination of each loan).
On Santo Gold’s hypo, if the participant when applying for a second loan has not yet repaid anything on the first loan, isn’t the second loan $0?

The time to negotiate provisions about a recordkeeper’s conversion-out is before the plan’s responsible plan fiduciary makes a service agreement with the recordkeeper the plan later might want to leave.
The time to negotiate provisions about a recordkeeper’s conversion-in is before the plan’s responsible plan fiduciary makes the service agreement with the recordkeeper that would, if engaged, process the conversion-in.
For many plans, either observation is impractical because a plan might lack bargaining power.
Beyond whatever service obligations a plan might get, a transition from one recordkeeper to another calls for not only caring work from every service provider but also strong and sustained oversight and supervision from the plan’s responsible plan fiduciary.
Each recordkeeper might, to supplement the plan fiduciary’s attention, appeal to the other recordkeeper’s sense of business decency and fair dealing.
A mature recordkeeper might work to get and keep a good reputation as both a graceful loser and an accommodating winner.
Bill Presson is right that—at least regarding mutual fund shares, collective trust fund units, and insurance company separate account units (forms of investment designed for redemptions)—a transfer of property other than a payment of money is unusual.

On Santo Gold’s hypo, isn’t the account balance after the first loan is made still $50,000—that is, $25,000 participant loan receivable + $25,000 other investments?
But wouldn’t ERISA § 408(b)(1) and Internal Revenue Code § 72(p)(2)(A) limit the amount for a second loan?
Consider 29 C.F.R. § 2550.408b-1(f)(2)(i) https://www.ecfr.gov/current/title-29/section-2550.408b-1.
Consider 26 C.F.R. § 1.72(p)-1/Q&A-20 https://www.ecfr.gov/current/title-26/section-1.72(p)-1.
Even before applying the tax Code limits, ERISA § 408(b)(1) limits the outstanding balance of all loans to the participant to more than half the participant’s vested account (measured after the origination of each loan).
On Santo Gold’s hypo, if the participant when applying for a second loan has not yet repaid anything on the first loan, isn’t the second loan $0?

The time to negotiate provisions about a recordkeeper’s conversion-out is before the plan’s responsible plan fiduciary makes a service agreement with the recordkeeper the plan later might want to leave.
The time to negotiate provisions about a recordkeeper’s conversion-in is before the plan’s responsible plan fiduciary makes the service agreement with the recordkeeper that would, if engaged, process the conversion-in.
For many plans, either observation is impractical because a plan might lack bargaining power.
Beyond whatever service obligations a plan might get, a transition from one recordkeeper to another calls for not only caring work from every service provider but also strong and sustained oversight and supervision from the plan’s responsible plan fiduciary.
Each recordkeeper might, to supplement the plan fiduciary’s attention, appeal to the other recordkeeper’s sense of business decency and fair dealing.
A mature recordkeeper might work to get and keep a good reputation as both a graceful loser and an accommodating winner.
Bill Presson is right that—at least regarding mutual fund shares, collective trust fund units, and insurance company separate account units (forms of investment designed for redemptions)—a transfer of property other than a payment of money is unusual.

If the point you ask about isn’t in the IRS’s correction procedures, consider:
Remove the excess from the elective-deferral non-Roth and Roth subaccounts in the same proportions that the participant contributions (including the incorrect amounts) had been directed to those non-Roth and Roth subaccounts.
That way might approximate what would be the account had the incorrect amounts not been taken from the participant’s pay.
And it might lessen a participant’s opportunity to make an after-the-fact tax-treatment choice.
Yet, this might be merely one of a few ways to correct the failure.
This is not advice to anyone.

Check the documents governing the plan to discern whether the plan allows or precludes a distribution made by delivering property rather than paying money.
If need be, amend the plan to allow a distribution of property.
Instruct the broker-dealer to redeem or sell the window account’s securities other than the one that’s untradeable. Apply the money raised as the plan ordinarily does.
Instruct the broker-dealer to re-title the remaining securities account as the distributee’s individual “taxable” account, no longer held regarding the retirement plan.
Report one or more Form 1099-Rs so a report includes the fair-market value of the untradeable security.
That a security no longer trades on an exchange (or never traded on an exchange) does not by itself mean that the fair-market value is $0.00. Even a petition, involuntary or voluntary, of the issuer’s bankruptcy, even for a liquidation bankruptcy, does not necessarily make common stock shares worthless.
The plan’s administration should not deprive the distributee of the value of the untradeable security. Even if untradeable now, it might later get an offer.
This is not advice to anyone.

Just to add to what Paul said - you will never get an in-kind transfer from one RK to another. All the shares are held in omnibus accounts. 

Peter lays out the basis for arguing that the plans were closed out in 2025, and makes it clear that this is solely the plan's fiduciaries' (read client's) decision.
I expect most practitioners would say don't sweat the $0.50 for Plan 1 and writing off the $0.50 with no adjustment to the 1099R, most would say it is really pushing it where the amount is $3,500 that was not closed out until 31 days after the end of the plan year. 
From the perspective of a service provider, I would explain to the client that it is their decision to make and their fiduciary responsibility and accountability for the consequences of their decision (unless you are a 3(16) provider). I would let the client know I disagree with the Advisor and I only would be willing to prepare a final filing for 2026 along with a 1099R for the residual payment.  If the client chooses to follow the Advisor's "promise", then the Advisor can help the client find someone who is willing to close out everything for 2025.
The plans are closing so there is no future work for you on those plans.  If your relationship with the client is ongoing, keep in mind that if the client chooses to follow the Advisor's advice over yours, that says something about the relative value of your relationship to the client.  This is also true about any relationship you may have with the Advisor.

The Instructions for a Form 5500 report generally allow a plan’s administrator (see I.R.C. § 414(g)) to report financial information on a cash, modified-cash, or accrual basis of accounting for recognition of transactions (if the administrator uses one method consistently).
If an administrator reports with accruals, it might recognize a dividend receivable (for the amount, if any, not paid to the plan’s trust by December 31) and a distribution payable as at December 31, 2025 (for the follow-on increment of the final distribution not paid until January).
Consider that a plan’s administrator, not a nondiscretionary service provider, decides the method of accounting.
Likewise, the administrator decides how accounting principles apply to a set of facts.
Even if an administrator made all preceding years’ reports on the cash-receipts-and-disbursements method of accounting, an administrator in its discretion might find that accrual accounting fits for an intended plan-termination year and facts like those you describe.
If an administrator lacks enough knowledge about generally accepted accounting principles, it might seek a certified public accountant’s advice (even if that professional will not audit, review, compile, or assemble any financial statements or other report).
This is not advice to anyone.

If the custodian of the current brokerage account also handles IRAs, and as @Peter Gulia said if the document allows (if it doesn't you can amend), then you may be able to do in-kind distribution by simple transfer of the account from plan to IRA. Even so, a market value of the distribution and rollover will need to be determined and reported on a 1099R.

Bigger picture questions: Why in this day and age would a plan have a 10% deferral limit? Was this an HCE? If not, could plan be amended retroactively to allow for that extra 2% deferral?

There is much to like in Paul I's sense about avoiding an ordering regarding previously-taxed amounts if a corrective distribution would not be a Roth-qualified distribution.

If I understand the issue, the plan limit is 10% of the sum of the pre-tax and Roth deferrals for the year, the excess deferrals are excess amounts that must be refunded.  The correction is to make a refund so the total of deferrals remaining in the plan are 10% of compensation.  The correction method does not specify any requirement on whether that the refunded excess amounts must reflect proportion of pre-tax and Roth deferrals that were originally made into the plan.  The plan also has no guidance.
With the lack of specific guidance, its on the Plan Administrator to decide how the plan will address the situation.  The PA needs to keep in mind that this type of operational decision establishes a precedent for future occurrences.  One consideration for the PA to keep in mind is the time and effort involved in making the refund.  Operationally, refunding from pre-tax first before refunding any Roth is far less complicated than either refunding pro-rata or refunding Roth first.  Consider that refunds of Roth get into issues like tax basis accounting, possible taxation of earnings paid from the Roth account, and year of taxation.
If these are not concerns for the PA or the PA is a masochist, then the PA could consider asking the participant to specify how much to refund from each account.

If the point you ask about isn’t in the IRS’s correction procedures, consider:
Remove the excess from the elective-deferral non-Roth and Roth subaccounts in the same proportions that the participant contributions (including the incorrect amounts) had been directed to those non-Roth and Roth subaccounts.
That way might approximate what would be the account had the incorrect amounts not been taken from the participant’s pay.
And it might lessen a participant’s opportunity to make an after-the-fact tax-treatment choice.
Yet, this might be merely one of a few ways to correct the failure.
This is not advice to anyone.

A plan that tax law classifies as a profit-sharing plan, whether it includes or omits a § 401(k) cash-or-deferred arrangement, is a pension plan if one follows ERISA title I’s definitions.
ERISA § 3(2)(A), 29 U.S.C. § 1002(2)(A) https://www.govinfo.gov/content/pkg/USCODE-2023-title29/pdf/USCODE-2023-title29-chap18-subchapI-subtitleA-sec1002.pdf.
And while tax law might not distinguish between “solo-k” and some other plan with a § 401(k) arrangement, an investment or service provider’s business classifications can matter greatly to consumers and to their intermediaries and advisers.
For example, Individual(k)Ô (Ascensus claims this as a trademark) gets a set of service agreement, trust agreement, plan documents, investment arrangements, and other provisions that’s distinct from other business lines. And differences between a “solo” and a “regular” 401(k) service arrangement can affect even a plan’s provisions. The plan-documents set Ascensus requires for an Individual(k)Ô omits some choices Ascensus allows for other business lines, and imposes some plan provisions Ascensus does not require for other business lines.
The sales or business lingo might seem awkward to a tax practitioner, but might convey meaning to consumers, intermediaries, and advisers.
For better or worse, “solo 401(k)” now has some trade-usage meaning to describe generally an arrangement a service provider designed for an individual-account (defined-contribution) retirement plan its sponsor intends as one not expected to cover any employee beyond a shareholder-employee or a self-employed deemed employee, or one’s spouse. And that trade-usage meaning includes a sense that investment and service providers offer constrained terms for those plans.

Before IRAs’ custodial-account agreements next are amended (by December 31, 2027), those accounts will have been operated for about eight years with at least some in-operation provisions different than the ostensible written provisions.
How does an individual learn which provisions are real, and which are displaced by Internal Revenue Code and other law changes?
Remember, many, perhaps most, of an IRA’s tax-sensitive provisions call for an individual to administer her account. Often, a custodian is protected in following the account holder’s instructions.
Why does the IRS not allow an agreement to state provisions by referring to the Internal Revenue Code?

A plan that tax law classifies as a profit-sharing plan, whether it includes or omits a § 401(k) cash-or-deferred arrangement, is a pension plan if one follows ERISA title I’s definitions.
ERISA § 3(2)(A), 29 U.S.C. § 1002(2)(A) https://www.govinfo.gov/content/pkg/USCODE-2023-title29/pdf/USCODE-2023-title29-chap18-subchapI-subtitleA-sec1002.pdf.
And while tax law might not distinguish between “solo-k” and some other plan with a § 401(k) arrangement, an investment or service provider’s business classifications can matter greatly to consumers and to their intermediaries and advisers.
For example, Individual(k)Ô (Ascensus claims this as a trademark) gets a set of service agreement, trust agreement, plan documents, investment arrangements, and other provisions that’s distinct from other business lines. And differences between a “solo” and a “regular” 401(k) service arrangement can affect even a plan’s provisions. The plan-documents set Ascensus requires for an Individual(k)Ô omits some choices Ascensus allows for other business lines, and imposes some plan provisions Ascensus does not require for other business lines.
The sales or business lingo might seem awkward to a tax practitioner, but might convey meaning to consumers, intermediaries, and advisers.
For better or worse, “solo 401(k)” now has some trade-usage meaning to describe generally an arrangement a service provider designed for an individual-account (defined-contribution) retirement plan its sponsor intends as one not expected to cover any employee beyond a shareholder-employee or a self-employed deemed employee, or one’s spouse. And that trade-usage meaning includes a sense that investment and service providers offer constrained terms for those plans.

Plans limiting pre-tax catch-up contributions for employees not subject to section 414(v)(7). The rules of paragraph (b)(3)(i) of this section also apply to a plan that includes a qualified Roth contribution program and, in accordance with an optional plan term providing for aggregation of wages under § 1.414(v)-2(b)(4)(ii), (b)(4)(iii), or (b)(4)(iv)(A), does not permit pre-tax catch-up contributions for one or more employees who are not subject to section 414(v)(7).
The bolded part makes all the difference here. Normally, you do not aggregate wages from multiple employers to deterimine if an employee is subject to mandatory Roth catch-up - even if the employers are part of a controlled group or otherwise aggregated for other plan purposes. However, the referenced sections provide for optional aggregation of wages if the companies are using common paymaster, are aggregated under 414(b), (c), (m) or (o), or in the year of an asset purchase. If the plan is optionally aggregating wages under one of those provisions, then you may end up with some employees who would not normally be subject to mandatory Roth catch-up, but who are solely because of the aggregation. What the quoted paragraph is saying is that a plan can restrict those employees to Roth catch-up even though strictly speaking they are not subject to 414(v)(7).