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Entity change


Belgarath
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So, suppose you have entity "A" which sponsors a Section 125 Plan. Entity "A" is now changing their name, and will become entity "B." Same employees, but new name, EIN, and management roles.

Can the new entity simply adopt the existing plan assets and liabilities, via a resolution and amendment, similar to what happens in a 401(k) plan, or are there different requirements for this situation for the 125 plan?

I have no details whatsoever, other than that they do have an FSA - don't know if there are other types of benefits as well. Assuming they have premiums paid through this plan, do you have any experience with whether the insurance carriers just allow the policies to "transfer" to the new entity, or will they have to re-apply, etc.?

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Why a new EIN?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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At this point, I've given the only details I have. Obviously, not much! I speculate that perhaps they are changing from unincorporated to incorporated, but that is purely a guess. So in a general way, I'm just trying to determine if the employer can "assume" a prior employer's Section 125 plan, similar to the qualified plan world.

Thanks.

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Since you are asking for us to indulge in speculation, let's imagine that the transition is accomplished by forming business B (empty, except  for some capitalization) and then the assets, liabilities, employees, etc. of A are acquired by B either by asset purchase or merger.  Assuming appropriate execution and documentation, the transplanting of of the section 125 plan can be accomplished essentially without missing a beat or any change that is apparent to employees.  Appropriate disclosure will address the formalities such as name change, but there need be no direct economic effect.

If business B is not essentially empty (such as having pre-acquisition employees and plans), the "appropriate execution and documentation" is more complex, but the same outcome in appearance to employees of A can probably be accomplished, at least for the remainder of the plan year, but that would be speculative.

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Conceptual addendum:  A section 125 plan, especially the FSA part, is NOT like a 401(k) plan even though it is usually more or less conceived and treated like one by the providers.  In a 401(k) plan, the assets are held in trust -- in the plan, of you will.  The plan is its own entity.

A section 125 plan is not a separate entity, self contained, with funds that belong to the plan for the benefit of participants.  The spending accounts are obligations of the employer; there is typically no trust, although there may be some sort of holding account that is erroneously viewed as "plan assets."  So a section 125 plan is not a thing in the same sense as a 401(k) plan -- the "accounts" that track the deferral and "spent" FSA amounts are assets and liabilities of the employer.  That affects the transfer of the "plan" from A to B. For example, there has to be a transaction that addresses the assets and liabilities of A and B, not just an adoption by B of the plan (with its assets in trust), which is essentially all that happens for a 401(k) plan that does not change providers and fiduciaries.

This means that details of the "plan" transfer are more intimately intertwined in the corporate transaction/reorganization.  It is not simply a modular event that only requires an appropriate corporate.resolution and some cosmetic amendment of plan documents.  But the helpful  providers may suggest otherwise.

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Belgarath, while I don't recall there being any guidance on this from IRS, I think what QDROPhile describes is the way this is typically handled, e.g. in asset acquisitions, and I have not seen it questioned by IRS.

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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Got a little more information today. It is currently an S-corp, and they are changing to an LLP mid-year.

So to be more precise, it was formerly Company A, and now it will be "Wile E. Coyote LLP dba Company A" - no other changes. But a new EIN, as mentioned earlier.

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They just keep the same plan. Employer not changing, then. Of course, if as likely this is LLC taxable as partnership, the members/partners won't be able to participate in Section 125.

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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