Predecessor Employers

[Guest Hilarion]

The adoption agreements for our prototype plan have a section entitled "Service for Predecessor Employers." A plan sponsor can then list any such predecessors. But the plan document nowhere defines just what a "predecessor employer" is.

Our clients are all employers in the same industry and they are in competition for business. It often happens that an employer will hire away certain preferred employees from a rival. The employer wants to usher the new employees into its plan and bypass the eligibility and vesting requirements that apply to other hires, so they utilize this section of the adoption agreement to name the other employer as a predecessor employer.

But is this OK? We don't have guidelines as to what is and is not permissible in this situation. The Code is a bit vague.

Reg. 1.411(a)-5(b)(3)(iv)(A) Predecessor employers states: "Service with a predecessor employer who maintained the plan of the current employer is treated as service with the current employer (see section 414(a)(1) and the regulations thereunder), and certain service with a predecessor employer who did not maintain the plan of the current employer is treated as service with the current employer (see section 414(a)(2) and the regulations thereunder."

Sec. 414(a)(2) Service for Predecessor Employer states: "in any case in which the employer maintains a plan which is not the plan maintained by the predecessor employer, service for such predecessor shall, to the extent provided in regulations prescribed by the Secretary, be treated as service for the employer."

I don't see that the Secretary ever deemed the issue sufficiently important to prescribe regulations. (On the other hand, my copy of the Code is pretty old.) Is this issue addressed elsewhere?

[mbozek]

Since the IRS has never issued any regulations on plans of predecessor employers there have never been any guidance and the courts have refused to enforce any rules on employers. The only accepted definition of a predecessor employer is where an employer changes its form of doing business, eg. goes from a partnership to a corp. and sponsors the same plan.