HCE lookback in cases of acquisition and merger

[Guest LMalone]

In 2001, Company X and Company Y have no relationship. In July 2002, X acquires all stock of Y, and Y is a wholly-owned sub of X. The Plan of Y was terminated prior to the acquisition. Y has adopted the 401(k) of X as a controlled group member and participating employer. No employee of Y is a 5% of either company.

To determine HCE's for 2002, is one of the following assumptions correct:

1) Y has adopted the plan, so Y may be considered the employer. Y had an employee who made $100,000 in 2001. That employee is considered an HCE for 2002.

or

2) X is the plan sponsor; X did not pay any compensation to Y in 2001. Therefore, no employee of Y received compensation from the "employer" in 2001 and thus no HCEs.

Here's Part 2. Assume that instead of terminating the Y plan, it was merged into X plan. Y adopts X plan as a participating employer . In this case, would Y employees' compensation in 2001 be considered for the 2002 HCE determination?

Any cites on this?

Thanks.

:confused:

[E as in ERISA]

In a sale of stock, there is typically not a "severance of employment" on the part of any of the employees. So prior service with Y would be considered for various purposes. However, there are exceptions to this rules. For example, the answer may depend on whether Y was previously owned by another parent company.