401(k) Plan Merger, Coverage Testing, and Vesting After an Acquisition

Start with the ratio percentage test, because it is the easier 410(b) test and does not require the average benefit test. The ratio percentage is the percentage of non-highly compensated employees benefiting divided by the percentage of highly compensated employees benefiting. A ratio of 71% exceeds the 70% threshold, so the plan passes 410(b) on that basis; the 68% average benefit test result is irrelevant if the ratio test passes. The 22 Calder employees with less than one year of service can generally be excluded from coverage testing under §410(b)(4)(A) because they have not met the plan's age-21/one-year eligibility requirement, assuming predecessor service is counted only after the merger. That exclusion should improve, not hurt, the ratio. But confirm that the 71% was computed using the plan's actual eligibility and that no Calder employees are treated as eligible before the merger. Also test §401(a)(4) for the new comparability allocation: staff receive 3% safe harbor plus 2% profit sharing, or 5% total, while owners receive 3% plus 8%, or 11%. The gateway requires each NHCE to receive at least the lesser of 5% or one-third of the highest HCE rate (3.67%), so 5% passes. The 3% safe harbor nonelective also satisfies the top-heavy minimum for non-key employees.

The merger cannot cut back accrued benefits or vesting. Under §411(d)(6), Calder participants' vested percentage cannot be reduced by the merger. Calder uses six-year graded vesting; Northline uses three-year cliff. For a participant with two years of service, Calder may give 20% or 40% vesting while Northline gives 0%, so Northline's schedule is not universally more favorable. The plan must preserve the more favorable vesting schedule for existing Calder balances or provide a §411(a)(10) election. Eligibility also matters: Northline requires age 21 and one year with semi-annual entry. After the merger, service with Calder counts for eligibility and vesting, so some Calder employees may enter sooner than Northline expects. Calder's last-day/1,000-hour allocation condition cannot be applied retroactively to cut back an allocation already accrued. I would amend the Northline plan to credit predecessor service, preserve the Calder vesting schedule for affected participants, and communicate entry dates. If the systems cannot handle dual schedules, keep the Calder plan separate for a transition year.

Merging is administratively cleaner and allows one 401(k) recordkeeping platform, one safe harbor notice, and one top-heavy test. But the merger must be paired with amendments: predecessor service credit, vesting preservation, and confirmation that the combined plan still passes 410(b) and 401(a)(4). Keeping the plans separate does not necessarily avoid top-heavy status because the plans are in the same required aggregation group if they cover the same employer's employees; top-heavy minimum contributions may still be required. Separate plans could preserve Calder's six-year graded vesting and its last-day condition for 2026, but that adds administrative cost and creates employee-relations disparities. My recommendation is to merge effective January 1, 2026, if the 71% coverage result is documented and the gateway/top-heavy tests pass, and to amend Northline's plan for predecessor service and vesting. If the coverage test is close or the data are unreliable, delay the merger one year and run the Calder plan separately while cleaning up service and compensation data.