Coverage Test

[Guest David Venuti]

I have a plan sponsor who is having problems passing the coverage/discrimination tests for an early retirement window ("ERW") program to be implemented early next year. The sponsor acquired a division of a company this year (April), which will be the look back year for the HCE determination next year. Although many employees of the acquired division would be HCEs if their compensation were annualized, none of them will be HCE due to their partial year with the sponsor. (1) Is there any applicable relief for a year of acquisition? (2) Is the sponsor allowed to annualize compensation for the year of acquisition to determine HCE status?

[Guest GMP]

410(b)(6)© SPECIAL RULES FOR CERTAIN DISPOSITIONS OR ACQUISITIONS. --

410(b)(6)©(i) IN GENERAL. --If a person becomes, or ceases to be, a member of a group described in subsection (b), ©, (m), or (o) of section 414, then the requirements of this subsection shall be treated as having been met during the transition period with respect to any plan covering employees of such person or any other member of such group if--

410(b)(6)©(i)(I) such requirements were met immediately before each such change, and

410(b)(6)©(i)(II) the coverage under such plan is not significantly changed during the transition period (other than by reason of the change in members of a group) or such plan meets such other requirements as the Secretary may prescribe by regulation.

410(b)(6)©(ii) TRANSITION PERIOD. --For purposes of clause (i), the term "transition period" means the period--

410(b)(6)©(ii)(I) beginning on the date of the change in members of a group, and

410(b)(6)©(ii)(II) ending on the last day of the 1st plan year beginning after the date of such change

[ak2ary]

The problem is of course that if the plan is amended to provide the early retirement window, the IRS would consider that a significant amendment and that would invalidate the transition relief