Mid-Year Acquisition and the 410(b) Transition Rule
Alpha Corp. acquires 100% of Beta LLC on July 1, 2025. Alpha maintains a calendar-year 401(k) plan covering all 120 of its employees: 100 NHCEs and 20 HCEs. Beta has 220 employees: 200 NHCEs and 20 HCEs, and no plan. Alpha's plan passed the §410(b) ratio test immediately before the acquisition, with 100% of both groups benefiting. Alpha wants to keep Beta employees out of the plan until January 1, 2027, and asks whether it can rely on the acquisition transition rule. After the acquisition, the combined controlled group has 300 NHCEs and 40 HCEs. The Alpha plan benefits 100 NHCEs and 20 HCEs. Alpha has not amended the plan's eligibility provisions; Beta employees are simply not yet employed by Alpha. Alpha's plan year is the calendar year. Beta's owner becomes an HCE of the group.
1. Calculate the plan's §410(b) ratio percentage for 2025 on a controlled-group basis and determine whether the ratio test is satisfied.
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Coverage is tested on a controlled-group basis under §414(b). The employer group has 300 NHCEs and 40 HCEs. The plan benefits 100 NHCEs and 20 HCEs. The NHCE coverage percentage is 100/300 = 33.33%. The HCE coverage percentage is 20/40 = 50%. The ratio percentage is 33.33%/50% = 66.67%. Because 66.67% is below 70%, the plan fails the ratio test for 2025.
That does not automatically mean the plan is disqualified for the year, because the acquisition transition rule or the average benefit test may apply. The administrator should document the pre-acquisition coverage (100%) and the post-acquisition census. The failure is caused by the acquisition, not by a plan amendment.
2. Can Alpha rely on §410(b)(6)(C) to keep Beta employees out through 2026? State the conditions and the deadline.
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Section 410(b)(6)(C) provides temporary relief for coverage changes caused by an acquisition or disposition. If the plan satisfied §410(b) immediately before the transaction and there is no significant change in the plan's coverage other than the transaction, the plan is treated as satisfying §410(b) and §401(a)(26) during the transition period. The period begins on the acquisition date and ends on the last day of the plan year following the plan year in which the acquisition occurs.
Here, the acquisition is July 1, 2025, and the plan year is the calendar year, so the transition period ends December 31, 2026. Alpha may therefore keep Beta employees out through 2026 if the conditions are met. It must extend coverage or otherwise satisfy §410(b) by January 1, 2027. Alpha should not amend the plan to expressly exclude Beta employees, because a significant change in coverage could forfeit the relief.
3. What alternatives does Alpha have if it does not want to cover all Beta employees in 2027?
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Alpha could amend to cover a portion of Beta employees and then test coverage under §410(b). If the ratio test still fails, the plan could use the average benefit test, which requires (1) the plan benefit the nondiscriminatory classification of employees and (2) the average benefit percentage test. Alpha could also use permitted exclusions such as age and service, or separate lines of business if the requirements are met.
Any amendment must be nondiscriminatory and must not cut back accrued benefits. A simpler alternative is to cover all Beta employees in a separate plan or in the Alpha plan and test the plans together or separately if they are not aggregated. The administrator should model the 2027 census before choosing.