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HCE after merger

Nancy D

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Hi all.

Company A acquires Company B, Company B's 401(k) plan merged into Company A's plan as of 1/1/18.  In looking at HCES for 2018 Plan Year, do 5% owners of company B now employed by Company A with no ownership in Company A count as HCES?  What about employees earnings $120,000 or more in Company B in 2017?

Any help would be greatly appreciated.

Thank you  

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choose from random dice roll, good faith effort or any other means at your disposal

The ERSIA Outline Book has the following (emphasis mine):

Chapter 1, Definition – Highly Compensated Employees Part G ERISA Outline Book

4.Acquisition or disposition of the ownership of an entity that changes the membership of the related group. The IRS has not provided guidance on how the HCE determination should be made when a new related group member is added during a year, or one is disposed of during the year.

5.Adding new related group member. When a related group member is added during the plan year, a reasonable approach should be to treat all related group members, including the new member, as a single employer in applying the HCE tests. It should be reasonable to take this approach, regardless of whether the new related group member was added as of the first day of the plan year or sometime during the plan year, although some plan administrators might modify their approach depending on how late in the plan year the new related group member was added, and whether looking at the data on a combined basis is practical.


5.a.Five-percent owner test. Applying this approach to the five-percent owner test, any employee who owns more than 5% of any member of the related group, including the new member, would be treated as an HCE with respect to all the members of the related group for that plan year. Ownership in both the lookback year and the determination year would be taken into account, even though the employers were not related in the lookback year. Remember, ownership is not aggregated to determine whether the percentage exceeds 5%. However, by treating the employers as a single employer, more than 5% ownership with any of the related group members makes an employee an HCE with respect to all of the related group members.


5.b.Compensation test. Applying this approach to the compensation test, any employee in the determination year whose compensation for the lookback year exceeded the applicable dollar amount with any of the related group members, would be treated as an HCE with respect to all the members of the related group. This should be reasonable, even though the employers were not part of a related group in the lookback year.


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I look at this way - if A acquired B in a stock sale, then I view as if B was part of A all along and would consider 2017 ownership and pay under B as same under A. If an asset sale, then I tend to view as new employees of A and ignore 2017 ownership and pay under B. I fully agree with Tom on any reasonable manner, this is how I define reasonableness.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services


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  • 2 months later...

Just to add 2 cents, I find myself dealing with this question quite often.  I believe that the position stated by CuseFan makes a great deal of sense.  Since an asset sale has participants making elections to take or rollover balances, while a stock purchase does not allow for that mechanism, there is clearly an important difference between the two classifications.  As I understand, with an asset purchase, the "old firm B" is said to continue to exist, but without the employees, clients and assets it previously had.  Employee actual terminate service from that firm and work for the acquiring firm. Conversely, a stock purchase has the entire firm transferred to new ownership, and in effect, there is no service termination or dissolution of "old firm B".  Just a transfer of ownership.  This is analogous to a simple shift in ownership between the previous owners.  Using this logic, an asset sale represents participants going to work for a new employer, therefore, ownership of the old firm B is not relevant.  Conversely, the stock acquisition has old firm B still in effect, so ownership of that firm would be used for determinations.  Anyway, that's my 2 cents.


Having braved the blizzard, I take a moment to contemplate the meaning of life. Should I really be riding in such cold? Why are my goggles covered with a thin layer of ice? Will this effect coverage testing?


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  • 2 years later...

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