Carve Out Method

[CLE401kGuy]

Plan permits entry after 1 month of service - no age requirement - entry dates are 1st of each month

I'm using the carve out method to do 401k testing - removing all those not meeting statutory eligibility

Through an asset sale effective 12/31/12 - the plan sponsor acquired an entity - it has a couple hundred employees many who have been with the entity for many years

The employees of the acquired entity are eligible to participate in the purchasing employers 401k plan effective 1/1/13

The plan sponsor wishes to recognize service with the prior employer for vesting

Question - can I carve these people out of the ADP test since they became employees 12/31/12 despite the employer permitting them entry at 1/1/13 and giving vesting service?.

Thanks

[ESOP Guy]

You need to look at the rules that allow you to test employees from an acquisition separately from the other employees.

Here is a link to someone that talks about it. Hope this gives you a place to start the rest of your research. It has been a long time since I did this so I don't want to try and do it from memory.

http://www.tepferconsulting.com/publications/_effects-mergers.pdf

Edit:

As I sit here longer it is coming back to me. This article is old but I am not aware of any change to these rules in the last 15 to 20 years. You basically have 2 plan year ends before you have to do combined testing. I think these rules will serve your purpose.

[Tom Poje]

The ERISA Outlook Book (under the definition of HCE, page 1A.3512012 edition)

1c in an asset purchase, if acquired company did not have a plan the acquired employees are treated as new employees

1e In some case employer may give credit for past service....since this is not mandatory... the voluntary crediting of service does not affect the analysis regarding HCE determination. therefore since not required it would be reasonable to disregard the acquired employees' compensation and ownership in making the HCE determination...

if HCE determination is disregarded, if they are treated as new employees, it would seem logical (if logic can be applied to the regulations) then it would seem you would apply the otherwise excludable rules.

(But again, there are no clear guidelines in the regs 1.401(k)-5 on mergers/acquisitions simply says "reserved")

As I understand it, you have 2 years for coverage testing, but there is no such rule for nondiscrimination (e.g. ADP test)

[Kevin C]

FWIW, Question 29 of the DC Q&A session at the 2011 ASPPA annual conference mentioned determining otherwise excludable when recognizing prior service.

IRS response. The IRS agrees with Answers #1, #2 and #4. However, it was inclined to disagree with Answer #3 on

the basis that the plan cannot have it both ways - recognize the predecessor service for eligibility rights, but disregard

it for the purpose of classifying the employee as an otherwise excludable employee for nondiscrimination testing

purposes.

[Tom Poje]

that's why we love this job

The one book says it's 'reasonable' to do things one way

Some of the IRS are 'inclined' to do it another way.

if it is an assets sale, even if you credit prior service, you can still treat the person as terminated, and therefore they can get a distribution.

so you do the best you can, and if someone questions it, you can point to whatever and say, absence guidance, we made a good faith effort based on....