HCE Compensation from aquired company

[Guest C Kampen]

Company A aquired Company B in 1999. Company A and Company B were unrelated prior to the aquisition. Service with Company B was used for vesting and eligibility. Employee A was part of Company B and earned over $80,000 with Company B in 1998. Employee A earned over $80,000 with Company A in 1999. Is the compensation from Company B counted as compensation for HCE purposes such that Employee A would be an HCE in 1999?

This is the only employee who would possibly be an HCE and of course the test for 1999 would fail. I don't think that this employee would be an HCE since it's not compensation from the "employer". Thanks for any answers.

[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.

[Guest JWBrown]

I agree that it's not clear what to do with these employees. The employees that my company has added as part of an acquisition have been treated as new employees as a general rule. (We do lots of acquisitions.)

In an acquisition where we take over sponsorship of the acquired company's plan, therefore becoming the "employer", we do recognize the employee's past compensation in performing testing for that plan. So the employee might be an HCE for the old plan and an NHCE for the acquiring company's plan.

Yes, it's not consistent, but any way you go, there will be problems. FYI -- We're providing comments as requested in Notice 2000-3.