Determining who are HCEs for purposes of the ADP/ACP Tests When One Co

[Guest smithee]

A corporation acquires another corporation in a stock deal. How are highly-compensated employees determined during the look-back year? Are the previously unrelated employers treated as one employer for purposes of determining who is an HCE? Where in the regulations/IRS pronouncements does it say this?

[Guest Do]

You should start with the universe of employees of the current year, then determine if their compensation from the look back year is in excess of $80,000. I read you message as saying that one starts with the universe of employees of last year, then determine which ones had compensation in excessof $80,000.

If you are starting with the universe of employees in the current year and you are wondering if you should count compensation earned last year with the acquired company and any company within its controlled group before it was acquired, the answer is yes. One of the subparagraphs of Code section 414(q) says that 414(B) and © apply to the determination of highly compensated employees. 414(B) and © are controlled group/single employer rules.