Predecessor Employer

[flosfur]

A 50% owner, Owner1, of a business sells his share of the business to the other 50% owner(s).

Owner1 then sets up his own practice (same profession).

Is the sold business a "Predecessor Employer for Onwner1 for purposes of using the prior service & comps for a new pension plan (DB plan) to be set up for the new practice.

Onwer1 signed a non-compete for the same area and the new practice is located many many miles away from the sold one - It should not matter but I thought I'll throw that in, in case it matters.

Cites with the reponse would be very helpful.

Thanks for your response(s) in advance.

[mbozek]

Why isnt this a new business? Its not a predecessor employer because the employer continues in business (presumably with the same Tax ID no and in same corp form)-It seems that owner has set up a new business as sole owner with a new date of incorporation or start of business.

[flosfur]

Well that's what I want to determine and it would be beneficial in the case I have if successor/predecessor relation can be used because:

Longer the past service a participant has, higher the PS liability which results in higher 10 year amortization charge and total plan cost for Section 404 purposes.

Let's look at the flip side of this problem.

Let's say the prior entity maintained a DB plan and the 50% owner had an accrued benefit in it.

Can the accrued benefit in the prior entity's DB plan be ignore for determining Section 415 maximum limit under the new entity's DB plan for the 50% owner in question?

In this case it would be beneficial "not" to treat the prior entity as a predecessor plan?

If this could be done then a person can disolve or sell one business and start another business entity every 10 years and get the Section 415 limits from each entity's DB plan each time ....

A long time ago I was told by my boss (legal reference was not asked by me and none was volunteered) that if someone had a 1/3rd or less partnership in a prior entity, the accrued benefit in the prior entity's DB plan can be ignored for Section 415 max.

I cannot find any regulations under Section 414(a)(a)(2) and the code itself does not define it - it leaves it to regulation.

[mbozek]

As noted in several ct decisions on 414(a) where participants have sued over the question of whether predecessor service should be counted for benefits under a successor employer's plan, the IRS has never issued regs. Because of the lack of guidance, clients will retain counsel.

[David MacLennan]

I think your question can be answered by noting what "employer" means under the applicable Code sections.

There is no common ownership between the 2 businesses at any point in time, so there cannot be a common control group. Thus, they are 2 separate employers.

Even if owner 1 still had 50% ownership in the partnership, and he also had his own practice, there would not be a common control group (would require > 50% ownership for "effective control" test), so both are separate "employers" under the code (I am assuming there no ownership attribution relationships, such as owner 1 and owner 2 are father and son, etc.).

Because they are 2 separate employers, using the past comp and service in the new business' DB plan would be no more legitimate than using his comp and service when he worked at, say, XYZ corp before he had ownership in a business.

The good news is, the new DB plan has a fresh 415 limit (meaning no offset if the partnership had a DB plan). But, you can't use that past service and comp history.

Now, if you want the past service and comp history (and are willing to accept the offset if he participated in a DB plan under the partnership), it seems your only options would be:

1) Create a common control group between the 2 businesses, such as by convincing owner 2 to give former owner 1 an option to buy owner 2's business (may sound impractical, but if the price is high enough and if there is a cordial relationship?).

2) Try to get a favorable det letter. Put it in the document and be sure to highlight the issue so that it will be included in the determination letter. Who knows, it may get a nod since employer aggregation is complex. It seems to me you would then have reliance. This option, in my opinion, requires the client's professional advisors believe it is a "gray area", because otherwise it is "sneaky". I don't believe it is a gray area, so I wouldn't recommend this option.

The cites would be 414c and the corresponding regs.

Getting counsel involved is always a good safeguard, but you may have a little trouble finding one knowledgable about this stuff.