How do we determine HCE's in a spinnoff company?

[Guest Rob Walter]

In the event that a company divests a subsidiary and the sub creates a plan for that year, do we consider prior compensation with the prior employer when we determine who is an HCE? (i.e. Company A spins off Company B as of 1/1/99 and B creates a 401(k) plan for their employees. Do we only count 5% owners as HCE's for the 99 discrim test?)

[Alf]

Although you can make the technical case that only 5% owners are HCEs, that will never fly with the IRS. If it were, a company could just reincorporate under state law each year and never have to worry about nondiscrimination testing.

Other than knowing that you can't ingnore the prior employer's information, there is no guidance on what to do.