Corporate Mergers - 401k plans and testing

[Guest Kerry]

Two companies merged on 1/1/98 (a small company came in under the larger holding company umbrella), both not-for-profit, where one company has a 401k plan and the other does not. Based on control group issues, the 401k plan needs to be put out to the smaller company by 1/1/2000. Question: how can the ADP test be done? Using 1998 results without the small company data. What's the best allowable option?

[LCARUSI]

I'm not sure I understand your question. But I think you're asking how the aquisition of the "small Company" affects 401(k)/(m) testing of the "big company" for 1998 and 1999.

401(k)/(m) testing is based on the deferral rates or contribution rates of ELIGIBLE employees. Since "small company" employees are not eligible to participate in the plan in 1998 or 1999, they are not included in the testing.

However, you should note that "small company" employees ,might be included in the determination of HCE/NHCE status. You should check the regs (414(q)I believe) to see when and how "Small Company" employees enter into the determination.

[Guest Big John]

You may want to be careful if you are using prior year data to compute the ADP test. I believe there are some special rules that apply when using prior year testing and there is a significant change in coverage.