HCE Exclusion in 401(k) Plan

[Hoard1]

A Plan excludes all highly compensated employees from participation as a class. The Company purchases another company and credits past service for purposes of participation and vesting. Are the HCE's of the aquired company HCE's for first Plan Year with new Company ( they did not earn more than 80,000 with the Plan Sponor in the prior plan year?

[Alf]

There is no answer. See the IRS request for comments on the issue of HCEs in M&As in Sec. V of Notice 2000-3.

I have heard two answers from the IRS at conferences. One said that the comp. history carries over in both stock and asset deals. The other thought that the comp. history only carries over in an asset deal.

In practice, I suspect that most employers are treating the employees as new employees, but that really sounds abusive to me, especially in the context of an asset sale.

[MWeddell]

Well, here's a third answer: the compensation history only comes over if it's a stock deal. By analogy to the 414(a) rules, if the buyer purchases the assets of the seller and also doesn't act as the plan sponsor of the seller's old plan (for example no contributions go into the seller's old plan after the corporate acquisition closes), then the service doesn't need to be recognized and it would be reasonable not to recognize the compensation either.

We're left to guess in the absence of IRS guidance, so there will be a wide range of reasonable interpretations available.