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R. Butler

Asset acquisition where employees leased for a short period

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Co. ABC is acquiring Co. 123 in an asset acquisition.  Co. 123 currently sponsors a 401(k) plan.  There will be a few week period after the acquisition date where the employees remain on Co. 123's payroll and they will be leased to Co. ABC during that time.

Co. 123's 401(k) plan will be terminated.  The employees will participate in Co. ABC's plan.

My inclination is that Co. 123's plan should be terminated prior to the acquisition date.  However, if Co. 123 continues the plan for the few weeks that the employees are leased to Co. ABC is there then a potential successor plan issue?  My inclination is yes that the "leased" employees are really common law employees of Co. ABC at acquisition.

Thanks for any guidance.

 

 

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With an asset purchase, 123's 401(k) is not sponsored by ABC unless ABC adopts the plan.  If ABC doesn't adopt the 123 plan, it won't matter if the plan is terminated before or after the sale.  If it was a stock purchase or if ABC adopts the 123 plan, the answer is different.

 

If the affected employees are common law employees of ABC at acquisition, then the leasing arrangement doesn't change that.  Being leased does not affect whether or not someone is a common law employee.  See Notice 84-11 Q&A 3. You haven't mentioned what the eligibility requirements are for ABC plan or whether service credit will be given for prior service with 123.  Both will impact when the purchased employees enter the ABC plan.

 

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Thank you for your response.  I didn't phrase my question correctly, but I think you have answered anyway.

I understand the seller's plan doesn't have to be formally terminated, but the seller wants to allow the employees to continue to participate after the acquisition date during a short transition period when the employees will be paid by the seller, but leased to the acquiring company.  My thought is that the employees should not be allowed to continue to participate in the seller's plan after the acquisition date  My concern is, that as you mention, the employees might be considered common law employees of the acquiring company thus creating potential successor plan issues.           

Is there a flaw in my thinking?

 

Thank you

 

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I know a guy who knows a guy who says that they had this exact scenario.  He also instructed those involved to not allow continuing deferrals after the acquisition date in the seller's plan. They had to wait until the purchaser got their payroll act together and they entered the purchaser's 401(k). There was a period of about two months between the acquisition date and the entry date in the purchaser's plan (special amendment to establish a special entry date for these folks). To do otherwise would subject the seller's plan to a claim of violating the exclusive benefit rules.

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Mike put his finger on it. The exclusive benefit rule is the issue. I think this is a common arrangement, and probably often the parties don't require that the buyer adopt seller's plan for the "leased" employees, but in the transactions we have advised we always require that because of the risk that the "leased" employees are really common law employers of buyer during the "leasing period" you would have an exclusive benefit violation unless buyer adopts. Where you are selling assets of a division, it's not a problem, because the seller's plan is not going to be terminated, but where it's the whole company, having the buyer adopt seller's plan to get a failsafe on the exclusive benefit issue would mean you then could not terminate. Of course, the buyer could always adopt seller's plan and keep it or merge it into a buyer plan.

A companion issue if you want to leave the "leased" employees on the seller's health plan during the transition period, and it's uninsured, is the "MEWA" issue. I think most are comfortable that if it's for a period short enough to fall within the M-1 reporting exception, they just blow it off.

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Can you clarify why you think this would satisfy the common law employee test? 

If seller is leasing all the employees who are doing the work for buyer (so all managers, supervisors etc are part of leasing group) and buyer is simply "paying" the seller for the work (no payroll, no other benefits, no real direction etc) - just a lump sum for all services through some sort of services agreement.  This would appear to not satisfy the common law employee test.  Is the risk the fact that the common law employee test is so subjective?   

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Maybe someone can explain better than I'm able to, but I always struggle to describe how this is different from an employer using a staffing firm/PEO model in which the employer terminates all its employees, then "leases" them back from the PEO the next day. 

I understand the PEO claims to be a joint employer or co-employer, particularly for benefits purposes, but if I recall IRS has also said it doesn't recognize any such status. In any event, couldn't the asset seller claim the same status for a few weeks?

For what it's worth, I've had (buyer) clients lease employees for a week or two after an asset sale and they generally are okay with the seller's 401(k) plan staying active during the leasing period. I advise of the potential risks involved, but with the seller still issuing W-2s, the short timeframe involved, the presence of an acquisition, and almost always the impending termination of the seller's plan, I just don't see it as a large practical risk. Many of the sellers' plans are under 100 participants and therefore not large enough for an audit, so mileage may vary. 

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