Company purchased. One or two discrimination tests?

[KateSmithPA]

Company B bought Company A effective 10/1/2000. We are the record-keeper for Company A. Plan assets did not transfer until 2001. Record-keeper for Company B included the employees of Company A in their discrimination test for 2000. But they included all 12 months of these employees' wages and deferrals in that test. Although we have requested census information from Company A for many months, we have yet to receive it, and therefore, have not completed their discrimination test. It was my belief that we would perform a discrimination test for Company A based on the wages and deferrals for the 9 months of 2000 before Company B purchased them.

My question is, did the record-keeper for Company B do the right thing with that discrimination test and if they did, does that mean that I do not have to perform a discrimination test for Company A? Also, I do not know if this is relevant, but the 2000 Form 5500 for Company B did not include the assets from Company A that had not transferred as of 12/31/00.

[david rigby]

I don't think asset transfer date is relevant.

The plans are responsible for testing. What happened with the plans? Merged on the date of acquisition? Later?

[KateSmithPA]

The plans were merged effective 10/1/2000.

[Brenda Wren]

KateSmith, I don't have an answer for you, but am very interested in this topic. I have not been able to find any guidance on exactly how you are supposed to test a plan in the year of an acquisition. Like you, I am the TPA for the company that was acquired. I have found that there appears to be some relief in the transaction year and the year following as far as coverage goes, in that you can treat the plans separately, but this relief does not extend to nondiscrimination testing. I also noticed that Ilene Ferenczy is doing a session on this exact topic at an upcoming seminar. Maybe she's out there somewhere and can help us??? In my case, a merger of the two plans will not occur in the transaction year and is not even being considered at this point. I think that's a moot point anyway.

[Guest T-BONE]

Generally, there is little, if any, IRS guidance in this area. I think that I've read that the IRS had planned on providing guidance, but due to the dificulty in creating guidance, they abandoned the project.

All of the commentary that I've read makes a distinction between stock sales and asset sales. In a stock sale, there is a strong arguement for including compensation and contributions from the beginning of the year. In an asset sale, it may only be necessary to include contributions and compensation form the transaction date. The same rules would apply in determining who is highly compensated. Stock sale . . . look back at compensation from acquired company. Asset sale . . . no prior year compensation.

Again, there is little IRS guidance, so it is generally the consensus that anything reasonable would be acceptable.

[Brenda Wren]

Thanks, T-Bone. Do you think it would be unreasonable to ignore the controlled group issue altogether for the transaction year and test the plans separately? In my case, the purchasing company has no desire to make any changes with regard to anything concerning the plans. They say "business as usual". In fact, I only assume another plan exists because the purchasing company is so large (thousands of employees).

[Guest T-BONE]

I think that if the controlled group takes advantage of the transition rule for coverage testing, then you may be able to perform separate ADP/ACP tests for each group, even if the plans have been merged. I caution that I think this would be a reasonable approach, but there is no IRS guidance.

[david rigby]

Doesn't the plan merger automatically create a short plan year for Plan A?

[KateSmithPA]

pax, thanks for your response. My concern is more with Company A than Company B because Company A is my client and Company B isn't. I do not understand why Company A would not be required to be tested for the first 9 months of 2000, although the discussion about whether the sale was stock or assets might be relevant. It is my belief that I still have to perform the test for Company A for 1/1/2000 through 9/30/2000 but I wish I could be certain of it. Because of the company's being bought, getting the census information for Company A is evidently a big hassle and the record-keeper for Company B is hoping that their solution, i.e. one all-inclusive test, will alleviate the HR department from giving me the information I have requested.

[david rigby]

I'm not sure if Plan A is required to test (and file 5500) on the basis of 9 months or 12 months. It is possible that the IRS will accept either. But that decision probably needs to be made in conjuction with Plan B.

I looked at the 5500 instructions. http://ftp.fedworld.gov/pub/irs-pdf/i5500.pdf Sorry, it did not seem to answer the question.

[Guest T-BONE]

I haven't looked at the 5500 instructions, but I thought that in practice a final 5500 is prepared for the short period (9 months) and the first due date would be 7 months after the end of the short period.

[Guest T-BONE]

From the 5500 Preparer's Manual:

4.10

Filing Requirements For Merged Plans

"If one plan merges into another, a final Form 5500 return/report should be filed for the plan year (consisting of 12 months or less) that ends when all assets of the plan that will not survive the merger were legally transferred to the control of the plan that will survive the merger."