safe harbor plan mid year acquisition

Company A sponsors a 401(k) safe harbor plan with about 80 participants.

Company A is going to acquire Co. B in an asset acquisition.  Co. B has about 40 employees.

Company A only requires a 60 day wait for participation.

We are trying to avoid the audit requirement for 2019.  Can Co. A adopt another new 401(k) plan by October cover the acquired employees?  If the new plan can be adopted is there an issue with amending the current safe harbor plan to exclude these employees that would be covered under the new plan?

My inclination is that we can't do what we are hoping, but still thought it worth checking.

Thank you.

When do you close?

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Can Co. A adopt another new 401(k) plan by October cover the acquired employees? 

You said asset purchase, so provided Company A and Company B are not related, the new plan covering only former employees of Company B would not be a successor plan under §1.401(k)-2(c)(2)(iii) and would be able to have a short initial plan year of at least 3 months under 1.401(k)-3(e)(2).

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If the new plan can be adopted is there an issue with amending the current safe harbor plan to exclude these employees that would be covered under the new plan?

This one is not as clear and there is more than one way to approach it.  Notice 2016-16 III D 2. says you can do a mid year amendment to make an "otherwise permissible change under eligibility service crediting rules ..." with respect to those who have not yet entered the plan.  A fairly common optional provision in pre-approved plans is to have employees acquired in a 410(b)(6)(C) transaction not be considered Eligible Employees until after the end of transition period.  I see this as an "otherwise permissible change under eligibility service crediting rules", which means the Notice says it can be amended prospectively mid-year. Others may disagree.

Another option would be to amend Plan A mid-year to exclude the former Company B employees by classification.  Would that be considered an "otherwise permissible change under eligibility service crediting rules"?  1.410(a)-3(d) says that plans can use criteria other than age and service to determine eligibility.  I think that makes a class exclusion an "otherwise permissible change under eligibility service crediting rules".

I think it's worth noting that if Company A had set up New Company B with the acquired assets and employees, the acquired employees would not become participants in Plan A unless New Company B adopted Plan A and I  don't think we would be having this discussion.