HCE Determination after a Stock Sale

[Scott]

Here are the facts:

Company A, which sponsors a 401(k) plan, has a wholly-owned subsidiary, Company X. Employees of Company X participate in Company A's plan.

In May 2008, Company B, which has no plan, purchases all of the stock of Company X. Immediately after closing, Company X starts a new 401(k) plan for its employees and shortly thereafter accepts a plan-to-plan transfer of the employees' accounts from Company A's plan. Assuming no employees are 5% owners of Company X, could there be any HCEs for 2008 in Company X's plan?

I understand that this is sometimes a tricky question because there is no IRS guidance on the determination of HCEs in a stock acquisition. However, it seems to me that, even though Company X changed controlled groups and the employees changed plans, because Company X was the employer of the employees both before and after the transaction, you would be required to look at the employees' compensation from Company X in 2007 (when it was in Company A's controlled group) to determine if anyone was an HCE in 2008 (when it was in Company B's controlled group) for purposes of X's plan.

Does anyone disagree?

[Guest Sieve]

Scott --

Since silence on this Board does not always signify approval, I will respond by saying that I do not disagree with your anlaysis of a stock transaction's impact on HCE determination.

[austin3515]

I've looked into similar questions before and found this nuggett in the ERISA Outline Book (paraphrased). The HCE question generally follows whether or not participants are treated as having a break in service for distribution purposes. Because Company B assumed the portion of the Plan attributable to Company X, that plan is treated as the continuation of A's Plan, and therefore, you WOULD look at X's 2007 payroll .

Conversely, but for the transfer of assets, the answer would be that you would NOT look at their 2007 compensation. That's because under a little known exception, transferring from a wholly under sub of Company A to a wholly owned sub of Company B actually accounts as a break-in-service (some GCM somewhere).

Seems strange, I know...