HCE Definition after acquisition

[LarryDavid]

Company A has acquired Company B, and pre-acquisition they use different definitions of HCE (Company A uses standard defintion; Company B uses top-20%).

I assume that the definition of HCE must be amended for all of the plans in one of the Companies (doesn't matter which one I don't think) in order to make the definition of HCE consistent amongst all plans in the "new" controlled group (i.e., the group that now includes both Company A and B).

Is there any sort of transition period allowed before this amendment is required? (Similar to the transition period for 410(b) testing?) I would guess the amendment has to be done immediately as of the date of the sale, but am not sure.

Also this is an asset sale, not a stock sale (not sure if that would change the answer).

[rcline46]

_{Asset sale? Then all 'acquired' employees are NEW HIRES, and therefore have no HCE history.}

[ETA Consulting LLC]

BUT, he is implying that Company A took over B's Plan.

Did this happen?

[LarryDavid]

Thanks to both of you. Company B is still maintaining it's own plans (they have a DB and 401(k)). The employees of Company B are not joining Company A's plan (they only have a 401(k)). So in essence all of the plans will operate business as usual.

In this case, do Company B's plans have to be amended to change the HCE definition? (In actuality what we want is for Company A's plan to change it's definition, since that wil be more beneficial for 410(b) and 401(a)(4) testing).

[rcline46]

If A bought the assets of B then there is no controlled group. Something is not right in the information. Under your scenario, B still has its owners and employers and B's owners are not related to A's owners. Something is just not computing.

[ETA Consulting LLC]

It's an asset sale where the purchaser takes over sponsorship of the plan for those employees. I would suspect there is a spinoff of the portion of each plan covering only those employees who were acquired through the acquisition. If those owners are now employees of the purchaser, then the purchaser just takes over sponsorship of the plan; leaving the seller with a company that has no assets (other than a huge sum of cash and goodwill). No big deal here.

As for the HCE issue, I would look at the possibility of using the transition period under 410(b)(6) for companies entering controlled group status for the first time as the period for which the definitions must be aligned. The immediate issue would appear to be that they are not a controlled group (even though they are treated as such since the purchaser has taken over the assets of the plan).

This is merely where I would begin my research, because I don't have an immediate answer to your question

Good Luck!

[LarryDavid]

Thanks guys. I definitely oversimplified my explanation of the situation, and in doing so probably created some confusion over the exact details of what's going on. I think ERISAtoolkit.com basically explained the situation as it actually happened (although to be honest I am only a side-player in this and was asked solely to do some NDT-related research, so I could be wrong on some of the details of hte actual transaction).

The main question that I'm dealing with now is the HCE issue, and whether the transition period would apply to amend the plans so that there is a consistent definition throughout the employer (I'l refrain from using "controlled group" since that probably confuses things).

My concern from a testing standpoint is the ADP test. I don't believe the transition rule under 410(b)(6) applies for this test (according to Rev Rul 2004-11), so therefore would it be possible for Plan A and Plan B (the corresponding 401(k) plans for each company) to run their tests with different HCE definitions, especially if the top-20% for one group includes employees from another group (meaning an employee could be an HCE in one test and not the other???).

I think I've completely confused myself at this point . Any additional thoughts on this are appreciated.