Acquired companies and ADP/ACP testing (esp. HCE determination)

[Guest CMC9]

My company (Company A) purchased another company (Company b) effectively 1/18/00. This was an asset purchase. Company B's plan was terminated as of that date. The participants could immediately rollover their account balances into the Company A plan.

The acquired participants could also enroll at the next enrollment period which was 4/1/00. Some participants terminated between 1/18/00 and 4/1.....of these, some were HCEs. Should those terminated participants be part of Company A's ADP/ACP test?

Technically, they were employees of Company A, but left employment prior to enrolling.

This is specifically important in determining if some terminated HCEs of Company B should be included in Company A's test. Any advice would be much appreciated. I've been told this is a "gray area of the law". Thank you in advance.

[MWeddell]

Only employees eligible at some point during the plan year to make elective deferrals to the plan should be included in the ADP test. (Substitute in "make employee after-tax contributions or receive matching contributions" and the same statement applies to the ACP test.) Therefore, acquired employees who terminated employment before April 1 and were not eligible to make elective deferrals are excluded from the ADP/ACP tests. This applies to both NHCEs and HCEs.

Whether one uses compensation prior to the corporate asset acquisition in identifying who is an HCE is unclear. I believe the best interpretation is by analogy to Code Section 414(a) regarding when one must recognize past service. In your situation, where it was an asset acquisition and the buyer never acted as the sponsor of the seller's plan, compensation paid by the seller does not constitute compensation paid by the "employer." Hence, none of the acquired employees are HCEs.