auto enrollment required?

[Old Reliable]

My client created an LLC last year and purchased an existing nursing and rehab facility which employs about 40 people. There was no plan in place with the previous employer.

Now they want to adopt a safe harbor 401k to benefit employees this year. Eligibility is one year of service (no credit for service with predecessor employer).

Would this qualify as a 'new business' and thereby be exempt from auto enrollment for 3 years?

[Nichol C]

FWIW, I would be cautious about treating this as a new business for the 3 year auto enroll exemption.

Even if a new LLC was formed, if it is the same location, same employees, and the same day to day operations, it may look more like a continuation of the old business rather than a brand new startup.

It may also matter how the deal was structured, such as a stock or asset purchase, and whether any controlled group rules apply.

[austin3515]

I think it very much matters if it was an asset purchase or a stock purchase. If your client bought the stock of the business through the LLC (i.e., the LLC owns 100% of the stock of the business that had been ongoing) then the employer is NOT new.

If on the other hand it was an asset purchase, I believe there is no question that this is a new legal entity with a bunch of new employees and the 3 year exception would apply.  The laws are all  very clear on an asset sale not having any successor connections to the prior entity.  Note that an asset sale might be for all of a business, or one sliver of a business.  There is no requirement that they need to hire the same employees either.

[Peter Gulia]

Under the Treasury’s proposed interpretation, an Internal Revenue Code § 414A(c)(4)(A) new-business exception is available “if, as of the beginning of the plan year, the employer maintaining the plan (aggregated with any predecessor employer) has been in existence for less than 3 years.” Proposed Treas. Reg. § 1.414A–1 A(d)(4)(i) (emphasis added).

The Treasury’s notice of proposed rulemaking states: “Comments specifically are requested on whether guidance is needed to define the term ‘predecessor employer’ as used in section 414A(c)(4)(A) of the Code[.]”

Internal Revenue Code § 414A(c)(4)(A) does not state or refer to a definition of predecessor employer. https://www.govinfo.gov/content/pkg/USCODE-2023-title26/html/USCODE-2023-title26-subtitleA-chap1-subchapD-partI-subpartB-sec414A.htm

The proposed rule includes some interpretations about plan mergers.

The proposed rule includes some interpretations about business mergers, and about other transactions that result in a different § 414(b)-(c)-(m) employer.

But § 414A is not in any of § 414(b)-(c)-(m)’s lists of Internal Revenue Code provisions for which a § 414(b)-(c)-(m) definition of the employer applies.

The Treasury proposes that a final rule (if published and effective) applies “to plan years that begin more than 6 months after” notice of the final rule is published.

“For earlier plan years, a plan [is] treated as having complied with section 414A if the plan complies with a reasonable, good faith interpretation of [Internal Revenue Code] section 414A.”

Observe too that a final rule the Treasury might make would be an interpretive rule, not a legislative rule Congress directed. A Federal court might be persuaded by, but does not defer to, the Treasury’s interpretation.

At least for 2026, a plan’s sponsor or administrator might get its lawyer’s advice and consider the range of possible and plausible interpretations. More than one interpretation could be a substantial-authority interpretation. And even if one seeks the higher more-likely-than-not standard, more than one interpretation might meet that standard.

This is not advice to anyone.

[austin3515]

I just don't see any basis for any sort of predecessor issues.  My understanding has always been the only way that could happen is if the buyer maintains the plan of the seller, or some sort of spin-off.  Are you saying that a straight asset sale, where the new buyer just so happens to hire some or all of the existing employees might somehow be considered not a new employer? 

[austin3515]

From ERISApedia.  I assume it is cool to post this,  lots of people post the EOB.  Anyway, great textbook, I rely on it heavily!  In short it is not as clear as I had thought.

Mandatory automatic enrollment (MAE) does not apply to a plan year if, as of the beginning of the plan year, "the employer maintaining such plan (and any predecessor employer) has been in existence for less than 3 years." [Code §414A(d)(4)(A); Prop. Treas. Reg. §1.414A-1(d)(4)(i)] The proposed regulations do not define predecessor employer. The Section 415 regulations [Treas. Reg. §1.415(f)-1(c)(2)], which look to whether the new employer substantially continues the business of the old employer, might be a good starting point for making a good faith interpretation of the statute. Under those regulations, a predecessor employer is defined in one of two ways, depending on whether the company being evaluated continued the plan of the earlier company.

In particular, the regulation provides that, if the current employer continued the prior plan:

[A] former employer is a predecessor employer with respect to a participant in a plan maintained by an employer if the employer maintains a plan under which the participant had accrued a benefit while performing services for the former employer (for example, the employer assumed sponsorship of the former employer's plan, or the employer's plan received a transfer of benefits from the former employer's plan), but only if that benefit is provided under the plan maintained by the employer.

On the other hand, if the current employer did not continue the prior plan (i.e., the benefits in the current employer’s plan were all accrued while the employees worked for the current employer):

With respect to an employer of a participant, a former entity that antedates the employer is a predecessor employer with respect to the participant if, under the facts and circumstances, the employer constitutes a continuation of all or a portion of the trade or business of the former entity.

Example 14.4.27 Fresh Foods swings open its doors on October 1, 2025, ready to serve the community, and promptly establishes a calendar year 401(k) plan. As a brand-new business, Fresh Foods gets to enjoy the "new kid on the block" exemption from MAE. This reprieve lasts until the plan year starting January 1, 2029. For now, the team can focus on stocking shelves and slicing compliance red tape.

Example 14.4.28 Now imagine a twist: Fresh Foods, while newly incorporated, buys out Ed’s Good Groceries, which has been serving the same location since 2015. Fresh Foods also keeps many of Ed’s long-time employees. This changes the game. Since Fresh Foods continued Ed’s operations, Ed’s is likely a predecessor employer, and Fresh Foods can’t claim the new business exemption. The MAE rules kick in right away, applying from the moment the 401(k) plan is established.

[Peter Gulia]

I say nothing about how, or even whether, some concept of a predecessor employer might affect a situation of a kind Old Reliable describes.

Rather, I note only:

       Congress did not enact a definition of predecessor employer for Internal Revenue Code § 414A(c)(4)(A).

       The Treasury department has not yet interpreted what “predecessor employer” means for I.R.C. § 414A(c)(4)(A).

I’m aware of other law that sets or interprets a concept of predecessor employer for other purposes or conditions. I don’t say anything about how those other uses might affect or influence any interpretation of I.R.C. § 414A(c)(4)(A).

A plan’s sponsor or administrator might get its lawyer’s (or other IRS-recognized practitioner’s) advice and consider the range of possible and plausible interpretations.