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Successor Employer

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What makes a company a successor employer? It is a 100% stock purchase or a change in entity only?

A prospect has a partnership that will dissolved on 1/31. The have a SARSEP. One of the partners is retiring. The other partner wants to form a new company on 2/1. They will have the same employees, line of work, and client's. I was not told that this would be a stock or asset sale. Would the new company be considerred a successor employer and able to adopt the SARSEP? I am thinking no, but maybe I am missing something.

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  • 3 weeks later...

There are no rules, regulations, or guidance under Code Section 414(a) to define the terms successor employer and predecessor employer. The IRS has stated verbally that when there has been a more than 50 percent change in ownership of the employer, a new employer exists. [see too, IRC 3121(a)(1), 3306(b), 4980, and IT Reg Sec 31.3302(e)-1 relating to successor employer for FUTA tax, and see IT Reg § 1.415(f)-1(a) defining predecessor for 415 purposes] For purposes of continuing a SARSEP, it would be risky (imo) to adopt the SARSEP plan of the former employer without first obtaining a private letter ruling.

Conversely, if there has been a 50 percent or less change in ownership, the relationship of successor employer and predecessor employer may exist. If a successor employer continues a plan for another employer (predecessor employer), all employees who worked for the predecessor employer must be given credit for the years of service for that predecessor employer. [i.R.C. § 414(a)(1); Ltr. Rul. 9336046; see also Ltr. Rul. 9853048 treating a new corporation as a successor employer for FICA and FUTA purposes]

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