Midyear Acquisition, Transition Period, and Plan Merger

Alpha owns 85% of Beta, so Alpha and Beta are a parent-subsidiary controlled group under IRC 414(b). For plan qualification, they are treated as a single employer for coverage, nondiscrimination, and other testing. That means the Alpha plan and the Beta plan cannot automatically be tested as if they were unrelated employers. However, IRC 410(b)(6)(C) provides a transition period when an employer becomes a member of a controlled group because of an acquisition. If the change in coverage is due to the acquisition and there is no significant change in the plan or its coverage during the transition period, the plans may continue to be tested separately as they were before the acquisition. The transition period generally ends at the end of the plan year following the plan year in which the acquisition occurred, so here it would end December 31, 2025.

For 2024, Alpha and Beta can likely test their plans separately under the transition rule, assuming no significant plan change occurred at or after the acquisition. The Alpha plan can be tested on its 200 employees, and the Beta plan on its 60 employees. The administrator should document the acquisition date, the pre-acquisition coverage, and the absence of significant changes. If the transition rule is unavailable, the plans would need to satisfy IRC 410(b) on a combined basis, and the Alpha plan's exclusion of Beta employees could create a coverage failure.

A plan merger is a significant change in plan coverage and benefits, so it can terminate the IRC 410(b)(6)(C) transition period. Alpha should not assume that the transition rule protects the merged plan for 2025. Once Beta's employees are covered by the Alpha plan, the combined plan must satisfy IRC 410(b) and IRC 401(a)(4) on a combined basis. The combined plan will cover 260 employees, with 42 HCEs. The coverage ratio must be tested using the combined group's NHCEs and HCEs, not the separate pre-acquisition populations.

For ADP testing, the merged plan is generally a single 401(k) plan for 2025, so Alpha and Beta employees are tested together. The prior-year testing data must be coordinated, and the plan cannot continue to test Beta separately merely because Beta had its own plan in 2024. If the plans remain separate for 2024, each plan can use the transition rule for its 2024 ADP test, but the 2025 merged plan uses combined data. Alpha should also review the safe harbor status: Alpha's 3% nonelective safe harbor may not automatically continue for the merged population unless the merged plan satisfies the safe harbor requirements for the entire plan year, including notice and eligible-employee coverage. A midyear or January 1 merger can affect safe harbor status, so the plan document and notices should be updated before the merger.

Beta's 4% match is a benefit, right, or feature under IRC 401(a)(4). Accrued matching contributions cannot be cut back under IRC 411(d)(6). If Beta employees have already earned a match for prior periods, those amounts must be preserved and fully accounted for in the merger. Prospectively, Alpha can amend the merged plan to change the match formula, but the amendment must be nondiscriminatory and must satisfy the IRC 411(d)(6) anti-cutback rules. If the merged plan retains the 4% match only for former Beta employees, that separate benefit feature must pass the benefits, rights, and features test under IRC 401(a)(4); if it is eliminated for everyone prospectively, the main issue is protection of accrued amounts.

The merger also raises vesting and distribution issues. Beta's match may have a different vesting schedule than Alpha's contributions. The merged plan must track vesting and cannot forfeit vested amounts. The plan should be amended to include Beta employees, preserve their service for eligibility and vesting, and update the summary plan description. Alpha should also check whether the merger triggers any 204(h) notice requirement (generally not for a 401(k) match change) and whether the combined plan's top-heavy status changes. Finally, the merger should be completed by a written plan merger agreement that specifies the transfer of assets and liabilities.