ADP Testing (can we test acquired EEs separately)

[pookah]

Plan allows for 1 year, age 21 with dual entry dates 1/1 and 7/1.

Sponsor, in February, acquires a related business with 100+ employees in an assets purchase. Plan is amended to credit service for vesting and eligibility with acquired company.

For this year's ADP testing (the year of acquisition) may we test the group of acquired employees (with appropriate service) separately as otherwise excludible (or some other classification) or must we test them all together or, alternatively, do we have a choice? To me, the regs seems ambiguous.

These employees were able to defer during the acquisition year, but only had imputed service for eligibility purposes.

Thank you.

[Tom Poje]

well, if it was a stock purchase I would say definitely not, because you can't exclude prior service

for an asset purchase, my understanding (but I would be first to admit I could be wrong) there is no requirement you count prior service.

thus, if I were to ask "Could the person have been excluded", I would have answered "Yes" and therefore conclude he is otherwise excludable. (or maybe a better term would be "could he have been excluded"

[Kevin C]

Your question is similar to part of Q29 at the 2011 ASPPA Annual Conference IRS Q&A session. In response to the part of the question where ASPPA proposed that you could grant prior service credit for an acquired group and still count them as excludable, the IRS responded with "However, it (IRS) 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]

I had forgotten they said that, though thinking about it more....

taking their response in the other direction

if you didn't grant them past service they would have been excluded.

so how is that not 'otherwise excluded'. sigh.

[Peter Gulia]

Answers suggested at a continuing-professional-education meeting are not only not a rule or regulation but also not any kind of administrative law.

Could the idea for separating the groups be supported by enough interpretation of whatever is law that a taxpayer that files its tax returns and information returns under that position has a reasonable-cause defense against penalties?