Chip,

There should not be any gray areas using this particular approach because there is a specific tax code section (402(c)(2) that defines an employee indirect rollover of a QRP distribution to be composed of the pre tax dollars first.

1) The pre tax dollars are composed of pre tax deferrals and all gains from all deferrals. After that total is rolled to a TIRA, the remaining amount is after tax. The basis amount is the same as this after tax amount and those dollars are converted to a Roth IRA tax free. I don’t see any difference between the two. Earnings on the basis should be going to the TIRA and I am not aware of any concern with peeling the earnings off the after tax contributions and considering them to be in the same bucket as the pre tax deferrals or their earnings.
2) Probably not a bad idea, but the response is contingent on no IRS rulings changing the current procedures before year end. Client could expect either a single 1099R showing the reduced taxable amount or separate 1099R forms, one for the pre tax amount and one for the post tax amount. Either way, the strategy would not be affected. Since the entire distribution is being paid to the client, there is no way for the plan to isolate the pre tax or post tax amounts in some way to a direct rollover. That possibility exists if a client gambles with a direct rollover of the pre tax amount to avoid withholding and only the post tax amount is distributed to the client.
3) A QRP CAN accept after tax dollars from another QRP as long as they agree to account for the basis within their plan. The only souce that a QRP cannot accept after tax dollars from is an IRA. Doing a pre tax rollover to the current QRP is probably more risky because there is a greater risk that the old plan issue an unexpected 1099R breakdown. A QRP to QRP rollover does not have the same protection under 402(c)(2) as mentioned above because the entire amount is not being paid to the client.
4) The downside of an unexpected ruling is not all that bad. It would mean that some after tax dollars went to the TIRA and some pre tax dollars went to the Roth. The TIRA would have basis that would have to be shown on an 8606 similar to making a non deductible TIRA contribution. The pre tax dollars going to the Roth would be taxable, but if the client objected to the tax they could recharacterize the conversion to a TIRA. Then all the funds would be in a TIRA, the same result as doing a direct rollover of the entire plan balance to a TIRA. No current tax and added basis in the TIRA. The downside then is client could not get their after tax funds out of the TIRA without paying taxes on the pro rated pre tax funds that would have to come out with them.

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