Two new companies are formed in late 2001, consisting mainly of employees from Co. X. They are NOT a controlled group. The new 401(k) plans for the new companies (effective 1/1/02) say that service with Co. X counts for eligibilty, etc.

How are the HCEs in the new companies treated for compliance testing? Is there a look-back period that goes back to their service with Co. X?

My quick reaction is to use the calendar year method of determining HCEs. This gets you to use current year income to determine status.

You can't use a calendar year election for a calendar year plan. As for the original question, I don't believe you would consider compensation prior to the new companies formation dates in this situation, but I didn't look anything up. Perhaps someone else can weigh in on this.

IRC 414(q)(1)(B)(1) references compensation from the "employer" in excess of $80,000 (as indexed). Only compensation paid to an employee while they were employed for the new companies, not the predecessor employer, is used to determine HCE's.

Therefore, unless the new companies paid compensation during the look back year, you need only look at ownership for determining HCE's for the current plan year.

I have been doing some reading that supports that conclusion. Thank you very much for your help.