HCE Determination

[Scott]

Company A sponsors a 401(k) plan. In 2001, Company A acquires all of the stock of Company B, which also has a 401(k) plan, and merges Company B's plan into Company A's plan. Employee X is an employee of Company B. During 2000 and 2001, Employee X received $100,000 of compensation.

Assuming Employee X is not a 5-percent owner, would Employee X be considered a highly compensated employee for 2001, or since his 2000 compensation was earned before he became an employee of Company A's controlled group, is he considered to have zero compensation during 2000, making him a non-highly compensated employee for 2001?

Would it make any difference if Company B did not have a 401(k) plan?

[MWeddell]

IRS guidance on the various discrimination testing questions arising from corporate m&a activity and plan mergers is sparse, so there may be one than one possible answer to your question. Other posters may answer this question differently.

That said, my opinion of the best answer to your question is that the individual in question is an HCE for 2001 based on 2000 compensation earned while he was an employee of Company B. In situations where there was a stock purchase and/or Company A acted as plan sponsor for Company B's plan, the best interpretation is that you've merged the two controlled groups into a single controlled groups and must honor the compensation history of both Company A and Company B. An analogous situation is that service must be recognized under Code Section 414(a), so it makes sense to also say that compensation history must be honored. Because this was a stock purchase, I would have reached the same conclusion even if Company B did not have a 401(k) plan.