Transition Rule

[justatester]

If a plan is using the transition rule, ie deemed to pass coverage immediately before a corporate action, how does this impact how the ADP/ACP test is completed? Under the transition rule, the plans are treated as separate for coverage purposes, does that mean they need to be treated as separate for ADP/ACP purposes? Or can they be tested together and disregard any BRF/General Test issues that may result?

Any help would be appreciated!

[ak2ary]

Under 410(b)(6)©, if the plans passed coverage immediately before the corporate transaction, they are deemed to pass coverage immediately after the transaction and for the remainder of the transition period. (assuming no material amendments). Unfortunately this applies solely for purposes of Section 410(b) and not for 401(a)(4).

As a result, you can test the plans separately for ADP/ACP (although if itwas an acquisition the rules are not crystal clear on who is a highly and they may be diffferent in a stock acquisition than in an asset acquisition) and for 401(a)(4). But they must pass these tests separately.

If you choose to aggregate the plans for testing, your transition relief appears to be lost. The "plan" for 410(b) did not exist prior to the transaction and has no relief under the transition rules...so you cannot ignore any problems.

It also seems to me the BRF testing is a 401(a)(4) issue, and is not extended relief...however you could make the arguement that if a particular BRF covers all of one plan and that plan is deemed to cover a 410(b) group then the BRF covers a 410(b) group and should be ok. I think in practice that, if the plans remain tested separately after the transaction and the BRFs currently and effectively benefited a 410(b) group before the transaction, most would assume that BRFs are ok for the transition period. If the IRS was t take a different position it would severely limit the utility of 410(b)(6)©.

[justatester]

Thank you for your response. So, in other words, if you are going to be relying on the transition rule..then all testing would be done as if the transaction never occurred...Correct? I am assuming if this interpretation is regardless of whether or not the assets are actually brought together. Or does the fact that the assets actually merge in the year following the initial transaction (although still within the transition period) impact your ability to use this rule?

Any additional help would be appreciated.

[ak2ary]

Not quite. The transaction itself may cause HCEs from the acquired company to become NHCEs in an asset sale, because they had no pay from the employer in the prior year. That may be different in a stock sale...but who is an HCE after a corporate transaction is a complicated issue.

But you can't ignore that the transaction took place for 401(a0(4) and ADP?ACP...its just that you can assume that each plan separately meets coverage

If you merge the plans into a single plan, you have no transition relief .. if the assets of the two separate trusts are commingled but the trusts not merged..you may be ok...assuming commingling the trusts is done properly

[justatester]

I would agree that the HCEs determination is a complicated issue. With that you get into serverance or separation of service and whether or not you have a continuation of the plan (especially in a meger situation). Based on some research we have been doing regarding the HCE determination...it seems likely in most cases, you would need to count compensation from the prior employer.

Just one last clarification to summarize the transition piece.....

If relying on the transition rule, then all testing during the transition period would be separate. If you merge the assets into a single plan, then the transition rule is out (unless the trust are not commingled). In the case of the merger, all testing would need to be completed as a single plan (coverage, adp/acp, brf, general etc).