ADP Test for Merged 401(k) Plans

[Guest dhughes]

Assume an employer, X. maintains two tax qualified 401(K) plans, A and B, which both have calendar year Plan Years.

Both Plans use the "current year method" of performing the ADP test. X wants to merge A into B, effective July 1, 2011.

Question: In view of the fact that Regulation 1.401(k)-5 is still shown as "Reserved", how does X perform the ADP tests for A and B for 2011?

Should X do an ADP test for A's short year ending June 30, 2011 and a separate ADP test for B for ALL of 2011?

If so, does B need to take into account the deferrals by the former participants of A for its short 2011 Plan Year, as well as for the period July 1, 2011 - December 31, 2011, when performing the 2011 ADP test for B for 2011, or, alternatively, should B only take into account the deferrals by such former participants of A from July 1, 2011 - December 31, 2011?

Thanks.

[Guest Harry O]

Are these two plans sponsored by the same employer? If so, why not permissibly aggregate and do one combined test for the full year?

[Lou S.]

I did a search and was going to start a new thread but this one seems close enough. I'm looking for guidance and afraid it may not exist.

In our case Company A and Company B are unrelated. Both sponsor calendar year 401(k) plans.

Company A purchases company B in April 2011. assume stock purchase and assume company B plan has no know compliance problems and has been independently audited for several years.

Company A wishes to merge Company B's 401(k) into Company A's 401(k) plan September 2011.

Does company B run a separate ADP test for 2011? If yes for what period? 1/1 - date of purchase? 1/1 through date of merger?

Or does Company A run a single test for all of 2011 for pay and deferal to both A & B?

Like the OP, because Regulation 1.401(k)-5 is still shown as "Reserved" I'm not sure what the correct answer is this case? Is there additional sorce guidance from the IRS on this perchance?

[ESOP Guy]

Lou:

Unless the company is just determined to merge mid-year I would suggest doing the merge at 1/1/2012.

I believe, someone please confirm this, the rules that give you a grace period for coverage testing extend to the ADP/ACP test with purchases.

I am doing this from memory. It has been a very long time since I merged two 401(k) plans, but I would look into that if you think the company is willing to merge as of 1/1/2012. I am very willing to be told I am wrong about the grace period for company purchases extending to the ADP/ACP testing, but that is my memory. (Ok, can I hedge my advice any more then I have?)

I can’t imagine the cost of merging at 1/1/2012 is much difference then 9/2011.

[Lou S.]

Thanks ESOP Guy.

I agree that 1/1/12 would be a good solution for testing (at least from our perspective) but they are doing it for more than the 401(k) as they are bringing everyone in under one payroll system in September and won't running them as separate companies through the end of the year which would allow them to take advantage of the 410(b)(6)© transation rule. They could use until 12/31/2012 if they choose to do so but I think they need to run as seperate comapnies in the transition period to take advantage of it.

Also merging in September ensures that 2011 is the final return for Plan B while merging at 1/1/12 creates a 2012 plan year.

[anspai]

I agree that waiting until the annv date is best, but I'm curious as to the answer if the employer doesn't or can't wait until annv to merge.

Facts: Unrelated Company A acquires Company B. Both run calendar year plans. A wants to merge B into A as of 4/1/15.

Does B test it's plan from 1/1 - 3/31?

Does A include B's participant contributions from 4/1 to 12/31 or full year?

Also if A's plan allows for predecessor service with B, for eligibility and vesting, how does A treat B's HCE's in the first year (2015) they are in A's plan?

Lastly, Assume the following:

B's plan had a 3 month wait and A's had a 12 month wait.

A's plan allows for predecessor service with B for elig and vesting

Sam is a participant in B's plan with 8 months of service.

Even with predecessor service, Sam has not met the waiting period for A's plan. But because Sam was already eligible for B, does he become eligible for A's plan immediately or can A require him to meet the waiting period for A's plan?

[Mike Preston]

Does 410(b)(6)© help you out?