Terminated Employee Entitled to excess assets?

We administer a 2 participant traditional defined benefit plan. A 100% shareholder and an employee. The plan has been in place for 10 years and has a calendar year end.

3 months ago the one employee / participant quit to move across the county. She was paid her 100% vested benefit. 

Today the 100% shareholder called and mentioned that she wants to retire next month and terminate the plan.

Question: If the plan is terminated this month and distributed to the 100% shareholder by October there may be a small amount of excess assets that can be absorbed by the 100% shareholder. Must the terminated employee who was distributed fully three months ago be entitled to any of the excess assets?

Thanks!

If they haven't had a break-in-service, then I would say they should definitely be included.  The IRS rules call for a 5-year look back, but they don't really enforce it.

The allocation of excess assets is really a plan amendment, so you should also be concerned about the timing of the amendment being discriminatory. 

I think the safest thing would be to include the other participant.

I believe you have to follow the plan terms.  If document says, allocate, then allocate.  If document says "revert to employer" I believe you can give it all to the owner assuming the general test for the year is passed.

Yes, read the plan document. Any allocation of excess, if permitted by the plan, must be nondiscriminatory. The question on the terminated participant is whether such employee was considered benefiting for 2024 or is a statutory exclusion for 2024 - if the person did not accrue a benefit in 2024 because they terminated and failed to complete an hours requirement in the plan AND also worked 500 or fewer hours. 

If you must include the employee in testing, you may need to give some of the excess. Also, be wary of minimum participation, if the employee didn't get a 2024 accrual because <1000 hours but can't be excluded because >500 hours, you'll need to give a benefit.

Participation can be tested on accrued-to-date method.    That might do the trick for the last year of the Plan.