Acquisition and HCE determination

[Guest cosmo1215]

Company A buys the assets of Company B on 1/1/2004. Company B's 401k plan is merged with Company A's on the same date. Company A plan is a 9/30 plan year end and Company B is a calendar year plan.

In determining HCE's for the 9/30/2004 plan year end, shouldn't we be looking at the compensation from 10/1/2002 thru 9/30/2003 for the Company B employees, since that is the determination (lookback) year for the HCE determination in the Company A plan? If the client makes the calendar year election, wouldn't it apply to all employees in both A & B?

[buckaroo]

cosmo1215,

I believe what you have stated is correct. Since the ees of company B are now part of the Plan of Comapny A, they would be subject to the same determination year and look back year of company A and its plan. Therefore, you would look at the Co. A's prior plan year. If the calendar year election was made, you would look back at the calendar year data. For further guidence and confirmation, take a look at the ERISA outline book definition of HCE. Pages 1.203 -- 1.209 would seem particularly helpful.

The only thing I would be unclear on would be the timing of the amendment of the plan to the calendar year election.

[jquazza]

Company A only purchased the assets of B. I know I will raise a wave of response here because this is a contentious point, but IMHO, they became new employees of A on the date of the acquisition, so unless you have 5% owners, you won't have any HCEs from B this year.

[g8r]

As jquazza is pointing out, you're not going to find a definitive answer on this and there are lot's of opinions floating around. In general, I agree with jquazza's general premise -they are new employees to A and are therefore NHCEs in the first year unless they are more than 5% owners. However, there might be a distinction here (and it's not clear from the facts exactly what is going on with the plan year). But, if you are testing for the period beginning 10/1/03 to 9/30/04, then for the period 10/1/03 - 12/31/03 they were not employees of A. Thus, I would argue that if they were HCEs with B for that period, I'd continue to treat them as HCEs for the entire 12 month period.

Is that correct? Who knows - I just have a problem arguing that it's a resonable interpretation of the rules where B's plan is merged into A's plan in the middle of B's plan year. Had there been a short plan year under B's plan prior to the merger (i.e., 10/1/03 - 12/31/03) then I'd feel more comfortable taking the position that they are all NHCEs under A's plan.