use of compensation from prior employer

[EGB]

I have a client that recently, through a stock acquisition, acquired another company. The client maintains a MP plan and the employees of the acquired company ("acquired employees") began participating in the plan on September 1, 1999 (effective date of acquisition). The plan year is Jan. 1 to Dec. 31.

In determining the amount of the contribution due to the acquired employees under the plan, the client wants to use the compensation paid to that employee for the entire calendar year (which would include compensation paid to the employee from its former employer that my client acquired) rather than using compensation from the date of participation.

I understand that if an employee is employed by the same employer (or within the controlled group) for the entire plan year but only participated in the plan for a portion of the plan year, the plan can state that compensation for the entire plan year will be used rather than from the date of participation.

My thought is that you can only use the compensation actually paid by the employer (or the employer's controlled group)and that commpensation paid by the acquired company to the acquired employees prior to the date of the acquisition cannot be considered.

Any thoughts? Thanks in advance for any comments.

[david shipp]

Since this was a stock acquisition, do we have a "prior employer" or simply a continuation of the old employer in a new controlled group?

If the employer is simply "continued," it would appear that full year compensation would be counted unless otherwise restricted by the plan.

[Dowist]

I would also think you could use the entire year's compensation, but it may require that the acquired employer adopt the plan. I don't think the acquired employer is one with the plan sponsor until the date of the acquisition. In order to count the compensation for the prior period the acquired employer would have to adopt the plan. You run into lots of other issues with this? How do you do the coverage and nondiscrimination testing for the 1/2 of the year before the acquisition? The answer may be to use the principles of the multiple employer rules - IRC 413 - because you have unrelated employers in a single plan - at least for the first 1/2 of the year - but you'd have to think it all through.

[M R Bernardin]

I would have thought it would be okay to recognize compensation with the acquired entity, based on the theory that your client is a continuation of the prior employer and that compensation paid prior to the acquisition is somehow imputed to your client as the successor employer. But I see that the 414(s) regulations permit the use of "prior employer" compensation only for defined benefit plans. This would be an interesting subject for a PLR.

[EGB]

Thanks for your comments Bernardin. I am not sure why the 414(s) regs only apply to defined benefit plans; I cannot think of any good reason for the distinction. Has anyone actually used prior employer compensation in the context of a DC plan? Has anyone taken the position that it is a continuation of the same employer such that the compensation can be recognized? Any additional comments would be greatly appreciated.