HCE status in asset acquisition

[Guest friedbrain]

Company A is bought by Company B in an asset deal and 401(k) accounts are transferred to a similar plan established by Company B. In determining the HCEs for the Company B plan, for former Company A employees, do you have to consider the compensation received from Company A during the look-back year for purposes of the $80K threshold? Basically, is Company A considered also to be the "employer"? Any thoughts are deeply appreciated.

[Guest friedbrain]

My guess is that the compensation received by the successor corp. would be annualized for purposes of determining the $80K limit as well as for the 401(a)(17) compensation limit. Is this correct?

[david shipp]

The IRS reserved the issue of HCE determination in merger and acquisition situations when the regs were issued, and they haven't provided any additional guidance since then. As a result, a plan administrator must do what is "reasonable."

In your situation you indicate that Co. B purchased the assets of Co. A. As a result, there is no relationship between A and B. Co. A employees became new employees of Co. B on the asset purchase date and have no compensation history with Co. B. All Co. A employees are therefore NHCEs with respect to their first year of participation in the Co. B plan.

I don't believe there is ever annualization of compensation for either 414(q) or 401(a)(17) purposes. There may be proration when a short plan year is encountered (the flip side of annualization), but in this case we just have employees entering the plan mid-year and that specifically does not require proration (e.g., see 1.401(a)(17)-1(B)(3)(iii)(B))

[if the transaction had been a stock purchase, Co. A employees would still be employed by Co. A and their compensation history would have applied in determining the HCE group for the combined companies.]