Question 253: At Q 11:2 of your book, you address the issue of what is a change in group membership that qualifies for a free pass of the participation and coverage requirements. You cite the Section 410(b) regulations that say, in part, "an asset or stock acquistion, merger or other similar transaction involving a change in the employer..." What does "involving a change in the employer" mean?
Answer: Before we can understand the regulation, we need to understand the statute from which it comes. IRC 410(b)(6)(C) gives a temporary free pass saying, "If a person becomes, or ceases to be, a member of a group described in subsection (b), (c), (m), or (o) of section 414," and certain other requirements are met, "then the requirements of this subsection shall be treated as having been met during the transition period with respect to any plan covering employees of such person or any other member of such group."
So the Code is dealing strictly with the formation or dissolution of controlled groups, ASGs, etc. Let's look at some examples. In each case we will assume that the plan satisfies the requirements of IRC 410(b) immediately before the transaction and that coverage does not change thereafter.
First Co. has a calendar year qualified plan which provides that only First Co. employees are covered. In 2000 First Co. buys 90% of the stock of Second Co. The two now are a controlled group. First Co.'s plan is entitled to a free pass of the coverage tests of 410(b).
In 2002 Second Co. buys all of the stock of Third Co. First Co., Second Co., and Third Co. now are a single controlled group. First Co. is entitled to another free pass, even though it was not directly involved in the transaction, because membership of its group changed.
In 2004, Second Co. sells all of the stock of Third Co.; First Co. and Second Co. still are in a controlled group, but Third Co. is no longer part of the group. First Co. is entitled to another free pass, because a business ceased to be part of its group.
Finally, in 2006, First Co. sells 25% of its Second Co. stock. First Co. and Second Co. no longer are a controlled group. First Co. has another free pass.
Now we come to Treas. Reg. 1.410(b)-2(f). This regulations extends the free pass to all "acquisitions and dispositions." In doing so, the regulation says, "For purposes of section 410(b)(6)(C) and this paragraph (f), the terms "acquisition" and "disposition" refer to an asset or stock acquisition, merger, or other similar transaction involving a change in employer of the employees of a trade or business."
The first question is, does this language cover at least the same ground as the statute? (If not, the statute obviously controls.) I believe it does cover all the situations the statute covers. What happens when 2 businesses become part of a controlled group? Under IRC 414(b), all employees of those businesses are deemed to be employed by a single employer. In other words, using the example above, in 2000 the employees no longer were employed by First Co. Rather, they were employed by a new single employer, First-Second. This is the approach IRS Notice 2002-4 takes in dealing with severance of employment.
What other transactions would be covered under the regulations that would not be covered under the statute? Here's an example:
Alpha Corp. runs a grocery store, as does its competitor, Beta Corp. On February 28, 2003, Alpha Corp. decides to buy nearly all the assets of Beta Corp. All the Beta Corp. employees come to work for Alpha Corp. A controlled group never was formed or changed, but there has been a change in the employer. If Alpha Corp.'s plan, just before the transaction, had been amended to cover all employees working at all Alpha Corp. stores that Alpha Corp. operated on February 27, 2003 (and thereby excluded all the Beta Corp. employees), the plan would be entitled to a free pass under IRC 410(b)(6)(C), thanks to the regulation.
Other situations, such as mergers, also can give rise to a free pass.
The transition rules for changes in group membership are detailed, but unfortunately they do not consider a variety of important issues. I discuss those rules in depth in Chapter 11 of my book, Who's the Employer.