HCE Status In Year Of Company Sale

[Guest Rand]

Company A sells Company B in a stock sale to Company C on June 1, 2001. As of date of sale, Company C stops participating in the Company A 401(k) Plan and becomes a participating employer in the Company C 401(k) Plan. (No transfer of plan account balances due to disposition of a subsidiary rule; instead distributions are made from Company A plan and participant may roll over money to Company C plan.) While not addressed in the sale agreement, I assume the compensation and deferrals of the Company B employees will be included in testing in the Company A Plan up to date of sale and included in the testing for the Company C Plan, along with the Company C employees, from June 1 – December 31 2001.

My question is how to determine the HCE or Non-HCE status of the Company B employees for this June 1 – December 31 period under the Company C Plan. Do I need to get the records and look back to the compensation earned by the employees in 2000 or can the new controlled group start date of June 1 be considered the first day of employment for these employees in the new controlled group – meaning that the Company B employees have no prior compensation with the new controlled group and therefore can all be treated as Non-HCEs for this period? I do not think there is any definite IRS position on this. Any thoughts would be appreciated.

(Would the treatment be different if the sale was an asset sale and not a stock sale and the Company B employees had become employees of Company C and had their account balances transferred from A Plan to C Plan?)

Thank-you for any responses on these matters. I would like to know what others are doing in these different situations for 2001.