Question 116: Physicians A, B & C form corporation XYZ and establish a pension plan covering the three physicians and 15 employees. Six years later physician A resigns and his stock is bought by B and C. Physician A, practicing out of the same office as physicians B & C, then establishes his own corporation, hires some of the employees of the XYZ corporation, and establishes a pension plan for his employees. That plan has a 6-year graded vesting schedule. Physician A's receptionist resigns after five years in the employ of A's corporation and several years with XYZ. Is the receptionist partially or fully vested?
Answer: The first question is whether there is something that would cause Dr. A, Inc. to be aggregated with XYZ, Inc. for qualified plan purposes.
They certainly aren't a controlled group. Presumably, A only owned 1/3 of XYZ, and now he does not own any of it. There's no way to construct a controlled group here absent some truly unusual situations and relationships.
Are they an affiliated service group? No. As I understand the question, A's interest was purchased, and then he set up the new corporation. So, at no time were there common owners between the two corporations. So there is no way they could be a traditional affiliated service group, even if, for example, XYZ regularly performed services for A, Inc. by collecting A's old receivables.
Having determined that the two businesses are not related under 414(b), (c), or (m), we next ask whether there is anything that would require A, Inc.'s plan to recognize the service performed at XYZ. Internal Revenue Code section 414(a) is the only rule that comes to mind; it has two provisions:
Point 1 doesn't apply because A, Inc. is not maintaining the XYZ plan. Point 2 doesn't apply because the IRS still hasn't written any regulations.
(1) in any case in which the employer maintains a plan of a predecessor employer, service for such predecessor shall be treated as service for the employer, and
(2) in any case in which the employer maintains a plan which is not the plan maintained by a predecessor employer, service for such predecessor shall, to the extent provided in regulations prescribed by the Secretary, be treated as service for the employer.
So, absent an express plan provision counting the earlier hours, I would say that the receptionist is not fully vested. Having said that, these situations frequently involve many peculiarities and are seldom cut and dried. I suggest that you have counsel review the purchase transaction and make sure that at no time was there an affiliated service group.