HCE determination in merged 401(k) plans

[Guest Diane DuFresne]

As a result of a business merger, two unrelated 401(k) plans merged (plan A and L), effective 1/1/2000, with plan A surviving. The participants of plan L were eligible to participate in plan A effective on the date of merger.

For HCE determination, do I need to consider the look back year of plan L? (some owners of the employer of plan L are not owners of the sponsor of plan A).

Any help would be appreciated.

Thanks

[Guest]

I like that, 'any help would be appreciated'. no seriously.

currently their are no 'rules' for what you describe.

I am looking at my copy of Notice 2000-3 http://www.benefitslink.com/IRS/notice2000-3.shtml

It is on safe harbor, but section V says 'the Service and Treasury are in the process of developing guidance regarding the application of the nondiscrimination requirements...and the highly compensated definition under 414(q), in situations where the entities of the sponsoring plans are involved in mergers, acquisitions...'

so someday, we will be told how to handle. thus currently you have to use the famous 'reasonable approach'. but what is reasonable?

I suppose, for starters, it is reasonable to treat anyone who made more than 80,000 in 1999 as an HCE. In other words, almost as if the plans were combined in the look back year as well

[Guest Diane DuFresne]

Thanks for the reply. My thoughts of "reasonable approach" also consider using the merged plan's look back year. It makes a significant difference in my ADP test (not to the positive, unfortunately!)

[Guest]

More information would be helpful. For example, what do you mean when you say "merger" -- was this a statutory merger of two companies, an asset acquisition or a stock acquisition? Although the rules are not clear in this area, you can develop "reasonable" positions based on the nature of the "merger" transaction.

[Guest]

that really does become interesting. for instance, suppose plan L didn't have a plan. if I wanted to use prior year ADP testing, do I

1. Use 3% avg for all their employees and then average that out with company As ADP avg from last year. That would seem reasonable since you are including them in HCE determination.

2. Use 0%. Nah, that is totally unreasonable.

3. Ignore them. Maybe, but since I used them in determining HCEs you would think I could count them in testing. Of course, if last years average was greater than 3% that would also hurt.

no wonder the IRS was asking for comments.

[alanm]

Hi Tom, I think you must consider all owners of both companies HCEs in the current year and the following year.

The merger is regarded as a continuation of L's plan and the business of L. When stock is sold by an HCE, they remain an HCE in the year of the sale and the year following. The fact the owners of L traded a more than 5% interest for a less than 5% interest in A due to the merger, probably wouldn't change their status.

[billfgrady]

Has the IRS moved on Notice 2000-3? It appears that Treas. Reg. s. 1.401(m)-4 is still pending. Anyone know the status of this stuff? Is there any other guidance in the meantime?

[Guest cease]

I think the following would be reasonable approaches for performing the non-discrimination test in 2000 on plan A:

1. Determine the HCEs of those participants in plan A only. In 1999, participants of Plan L were not in the Plan A plan. If there are any 5% owners in Plan L, they must be treated as HCEs.

2. If you are using the prior year rule for ADP/ACP, use the actual results for Plan A participants and the 3% rule for Plan L participants.

3. If you are using the current year rule for ADP/ACP, use the results for Plan A participants over the entire plan year and use the results for Plan L particpants from the merger date to the end of the plan year. Only use compensation earned while participating in Plan A.

Hope this helps.