S corp conversion and deferrals contributed prior to the conversion

We have a sole prop client who contributed $20,500 into the plan throughout 2022.  At the end of 2022, she was advised to elect S Corp status for 2022.  I was told by her CPA firm that she will have no Sch C as the entire 2022 year is being reported under a tax filing for the S corp.  (The conversion to S was solely to reduce her Sch C Medicare comp from $1,000,000+ to $200,000 in wages.)

There was no 401(k) deferral deduction on her W-2.  It seems to me we have no choice but to count her deferral in testing for 2022 - the money is in the plan.  But since she has no Sch C I'm not sure she can take a tax deduction on her 1040.  But that is not my problem I suppose.  I wonder it the IRS would take the position the deferrals are all excess because she did not have deferrals on her W-2 and had no sole prop compensation to support the deferrals.

Comments? Thanks.

Tom 

If she had a deferral election in place when she was still unincorporated, that should still carry over after the change in tax structure.  And since unincorporateds are allowed to pre-fund deferrals before the EOY "income declaration day", I think that it would still be reasonable for the funds to stay in the plan as subject to the (if it does exist) proper election. 

Of course, I'm no lawyer....

what about having both sole-prop and S crop to adopt the plan via joinder agreement?  This should have been done before December 31 I guess but is there a room to make it work given https://www.irs.gov/pub/irs-drop/n-23-43.pdf.? I have not read it through in details yet.   Just thinking aloud....

It seems to me that if you are going to retroactively become an S-Corp for 2022 (and show W-2 income), then the rules for W-2 employees should also apply for 2022: Did the individual make a proper deferral election in 2022 with respect to the compensation deferred prior to earning this compensation? If the answer is yes, then you can amend the W-2 to show the 401(k) contribution. If the answer is no, can we recharacterize the 22k as a profit sharing contribution for 2022? 

1 hour ago, FORMER ESQ. said:

It seems to me that if you are going to retroactively become an S-Corp for 2022 (and show W-2 income), then the rules for W-2 employees should also apply for 2022: Did the individual make a proper deferral election in 2022 with respect to the compensation deferred prior to earning this compensation? If the answer is yes, then you can amend the W-2 to show the 401(k) contribution. If the answer is no, can we recharacterize the 22k as a profit sharing contribution for 2022? 

I think that amending the W-2 makes the most sense. If they are going to effectively retroactively create W-2 income, then they should be able to create the deferrals (that did in fact happen). Otherwise, there is no earned income to apply the deferrals against, and then the only option is to use the money deposited as PS. 

Thanks all and Ed - she maximized 415 so recharacterizing is not an option.  I wil tell the CPA they may want to amend the W-2 to get a tax deduction.