True-ups

This is a really silly situation, but potentially confusing.

Corporation A purchases Corporation B during 2025. Corporation A sponsors a 401(k) plan that has true-ups. Corporation B's plan will be terminated, but effective December 1, the employees of corporation B will transfer to Corporation A. Corporation A credits service with Corporation B, so those employees will be eligible to defer in the Corporation  A plan immediately.

So, it seems that at least theoretically, there could be a true-up for these employees (fewer than 20) for the 1-month of salary deferrals in the Corporation A plan. Although the Corporation A plan calculates the match on an annual basis, they couldn't use compensation paid from another company while they were not a controlled group. Any disagreement with that? (As an aside - if they became a controlled group in, say, June, could/should the deferrals from that date be used in the calculation of a true-up in the Corporation A plan, even though those 2o employees were still employees of Corporation B?)

Then we come to the ridiculousness. The Corporation A HR person is adamant that they don't want to make any true-ups for the former Corporation B employees. If we assume that the deferrals for these former Corporation B employees only start in December and are based only on salary/match in December, the potential true-up is negligible at best. Is there any way to avoid a true-up in this situation, if the calculations require it? It seems like an amendment prior to 1/1/26 could result in a cutback.

I'm probably making this way more difficult than it is.

If the B employees become eligible for the A plan on 12/1, and the A plan provides for a true-up, that is no different from any other new participants in the A plan who entered the A plan on any other day during the year.  All participants in the A plan get the true-up for the time they were participants in the A plan.

Whether B employees get any true up related to the time before entry into the A plan or any time before the purchase of B by A will depend on multiple factors like was this a stock purchase or asset purchase, was the B plan terminate prior to or on or after the purchase date, did the B plan have a catch-up provision, is compensation earned from B used for other purposes in the A plan, does the purchase agreement have any provisions about how the B employees will be treated under the A plan...

Reviewing this type of documentation is best left to legal counsel, a consultant well-versed in acquisitions, or both.

Depending on these factors, Corporation A HR person may be pleasantly surprised or horrified at the what A is required to do for former B employees.

5 hours ago, Belgarath said:

This is a really silly situation, but potentially confusing.

This is actually a really good question...

Off the top of my head, I want to say that you determine the related employer status for the tax year on the last day of the tax, not for a portion of the tax year. 

3 minutes ago, Paul I said:

All participants in the A plan get the true-up for the time they were participants in the A plan.

Assuming the plan excludes comp prior to participation, right?  @Belgarath hypo is more interesting if it does not exclude comp prior to participation as it really cuts to the question "does the transaction date matter"?

Thank you both for your comments. The A Plan DOES exclude compensation prior to participation, so it simplifies this particular situation. The B Plan is going to be terminated, as far as I know, effective 12/31/25. There was originally some talk between the employers and their advisors abut merging the plans, but they decided against that.