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Acquiring new physician practice


Chippy

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I have a current 401(k) plan, there are 6 doctors that own the current practice, company A.  They are acquiring a new practice, company B;  the new entity will be owned 80% by company A and 20% by the new surgeon at Company B.  I think they will be considered a controlled group since Company A owns at least 80% of company B and can be part of the current plan with no problems.  Am I thinking correctly?  (Just need to amend to allow for participation and counting of prior service for company B.) 

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Except for the potential application of the rule of parity, all past service with B automatically counts, at least for eligibility, the moment that B adopts the plan. I would argue that service with any related company must also be similarly counted for eligibility since related employers are treated as a single employer (IRC 414(b), 414(c), and 414(m)). Even for unrelated employers, IRS sample plan language provides “For purposes of plan participation and vesting, the adopting employer and all participating employers shall be considered a single employer. An employee’s service includes all service with the adopting employer or any participating employer (or with any employer aggregated with the adopting or participating employer under §414(b), (c), (m), or (o)). An employee who discontinues service with a participating employer but then resumes service with another participating employer shall not be considered to have severed employment.” In other words, not only are related companies treated as a single employer, but even for a MEP, all adopting employer are treated as a single entity for the stated purposes.

 

Even if these companies are neither a controlled group nor an affiliated service group, the IRS does not limit its analysis to only the presentation of the sample language excerpted above. The directions to the IRS agent reviewing a preapproved specimen plan reads as follows:

 

“The exclusive benefit requirement is applied to a multiple employer plan by treating all employees of all participating employers as if they were the employees of the same employer. In addition, the minimum participation requirements of § 410(a) and the minimum vesting requirements of § 411 are applied as if all participating employers were a single employer, and service for any employer counts as service for all.”

 

Thus, in my view, the granting of predecessor service should be limited to only those situations where such service is not already required to be counted, such as when the employer wants to grant service with named employers that are neither an adopting employer nor a “related” employer within the meaning of 414(b), (c), or (m). Otherwise, employers and their advisors may be more likely to infer that such service would not otherwise be required to be taken into account, and thus lose sight of the fact that such a design option exists as a means to make a discretionary grant of service. (By "named" companies, I do not suggest that each such company must be individually named, but only that the companies can be readily identified (as if by name).)

 

The only service that I believe can be excluded for eligibility purposes would be using the rule of parity, and then only when the plan document contains that rule. For vesting, the rule of parity might apply, and there is also usually an option, for example, to exclude service prior to the existence of the plan or any predecessor plan (as defined for purposes of IRC Section 411). Finally, the 415 regulations provide many rules relating to predecessor service.

 

Even if these companies do not constitute a controlled group (or if ever cease to be a controlled group), the facts strongly suggest the potential existence of an affiliated service group. But even if the companies are unrelated, I urge you to consider that it is probably unnecessary, and perhaps not good practice, to name "predecessor employers" if such companies would need to be treated as a predecessor employer either by law or by the terms of the plan. The IRS takes the position that even unrelated employers must give service credit to other adopting employers. Thus, in general, I would turn your question around by saying that there is a presumption that all service counts for most purposes for these two employers unless you find an exception under the law and under the terms of the plan, and elect such exception, such as the rule of parity, to name one.

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Chippy, under 1563(a), an 80% or greater parent-subsidiary ownership link creates a parent-subsidiary controlled group. You say that A will own 80% of B, so on its face this would seem to create a parent-sub controlled group. It can get complicated if there are multiple classes of stock, special provisions in shareholder agreement, etc., so I cannot provide a definitive answer to your question here, but it would seem that you would have a parent-sub controlled group, barring special circumstances that you have not disclosed.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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"Except for the potential application of the rule of parity, all past service with B automatically counts, at least for eligibility, the moment that B adopts the plan."

I am not sure about this above statement.  I am looking at a merger/acquisition checklist from ASC and  whether or not service has to be counted for eligibility depends on a number of factors, including what type of acquisition occurred (asset purchase vs. stock purchase) and whether the company that was acquired already had a plan.

In a stock purchase,  generally service with the acquired company must be counted for purposes of the buyer's plan.  

In an asset purchase,  if the acquired company has a plan and the buyer is taking over sponsorship of the plan or the assets of the acquired company's plan are merging into the buyers plan, then service with the prior employer must be credited.  If the acquired company does not have a plan or has a plan that is being terminated, service with the acquired company is not required to be counted so a plan amendment would be necessary to authorize crediting of service from the prior company.

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ACK: Thank you for the clarification. I agree with you that if this is an asset sale, and if as the result of the asset sale there are employees previously employed by the seller who are being hired by an unrelated buyer, then there is no service that is required to be "carried over" to the buyer. I did not get that impression, however, that this is an asset sale. Like Luke Bailey, I inferred that this was a stock transaction. There was no mention of any seller of any assets, nor any mention of employees previously employed by seller who were to become employees of the buyer as a result of the transaction. Instead, there was a new entity being formed where previously (apparently) there was none. (We do not know much about the physician at Company B.) It is quite possible that some assets were the subject of conversation, but the overall business objective in the original question appeared to be that the old and the new entity each wanted to make sure that all employees of either entity would be credited with service under a common plan, or at least that Company B's employees would have their service with Company B recognized under Company A's plan. In an asset acquisition between otherwise unrelated parties, it is unlikely that both buyer and seller intend to share a plan, much less grant predecessor service to each other, as generally each party to an asset sale wants to go their own way afterwards (which is why stock sales are unattractive to parties with those intentions). All of these facts suggested to me that this was a stock transaction, but I acknowledge I could have so stated.

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14 hours ago, Doc Ument said:

Instead, there was a new entity being formed where previously (apparently) there was none. (We do not know much about the physician at Company B.)

I  don't think they are forming a new entity, it is just that the acquired entity (company B) is "new" to  the existing entity (Company A).  It sounds like a stock sale with a parent-subsidiary controlled group like Luke said earlier.

 

 

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