DETERMINING HCE'S FOR NEW MEMBER OF CONTROLLED GROUP

[Lori H]

COMP. "A" BECAME A MEMBER OF A CONTROLLED GROUP IN 2004. IN 2003 COMP. "A" WAS OWNED BY A CANADIAN COMPANY WITH NO 401(K). IN 2004 COMP. "A" ESTABLISHED A CALENDAR YEAR 401(K) TO PROVIDE BENEFITS TO ITS EMPLOYEES SOME OF WHICH WERE EMPLOYEED WHEN OWNED BY THE CANADIAN COMPANY.

IN ORDER TO DETERMINE WHO HCE'S FOR 2004 ARE, WOULD YOU STILL LOOK AT COMP/OWNERSHIP IN 2003? ALSO, IF AN EMPLOYEE EARNED IN EXCESS OF $90,000 IN 2003 AND/OR WAS A 5% OWNER, YET WERE NOT EMPLOYEED IN 2004, WOULD THEY FACTOR INTO THE ADP/ACP TEST? WHAT IF THEY WERE REHIRED IN 2005?

THANK YOU KINDLY.

[jquazza]

IMHO, you would have to consider whether the acquisition was an asset or an equity sale. If it was an equity sale, then, the company did not change, only it's owners and therefore, you would have to consider 2003 compensation and ownership to determine the HCEs. If it was an asset sale, you may argue (I know some people have different opinion on this subject) that the compensation earned while employeed by the predecessor (and ownership of predecessor employer) is irrelevant.

As far as people not employed in 2004, why would you want them in your 2004 test (no comp, no contribution etc...) There are 253 posts on the subject in this forum.