Subscribe Now!
Free Daily News, Jobs, Webcasts, Discussions
Post and Distribute
Your Jobs
ARPA News
ARPA Webcasts

Featured Jobs

DB/DC Administrator

Primark Benefits
(Telecommute / Burlingame CA)

Primark Benefits logo

DC or DB Administrator

Farmer & Betts, Inc.
(Telecommute / Tacoma WA / Tualatin OR / Littleton CO)

Farmer & Betts, Inc. logo

DB Retirement Plan Administrator

The Nolan Company
(Telecommute / Overland Park KS)

The Nolan Company logo

Employee Benefits/Health and Welfare Attorney

Miller Johnson
(Telecommute / Grand Rapids MI / Kalamazoo MI / Detroit MI)

Miller Johnson logo

Retirement Plan Administrator

My Benefits, LLC
(Telecommute / Daphne AL / Atlantic Beach FL)

My Benefits, LLC logo

401(k) Implementation Manager

Human Interest
(Telecommute / San Francisco CA)

Human Interest logo

Product Support Consultant

ftwilliam.com part of Wolters Kluwer Legal & Regulatory
(Telecommute)

ftwilliam.com part of Wolters Kluwer Legal & Regulatory logo

Retirement Plan Administrator

Bates & Company
(Telecommute / Winter Park FL)

Bates & Company logo

Director of Finance

NYCDC of Carpenters Benefit Funds
(New York NY)

Retirement Plan Consultant / Relationship Manager

Associated Pension Consultants
(Chico CA / Sacramento CA)

Associated Pension Consultants logo

DC Retirement Plan Administrator

The Nolan Company
(Telecommute / Overland Park KS)

The Nolan Company logo

Retirement Plan Administrator (Account Manager)

Kushner & Company
(Telecommute / Portage MI)

Kushner & Company logo

Plan Document Specialist

Jocelyn Pension Consulting
(Telecommute / Boulder CO / San Rafael CA)

Jocelyn Pension Consulting logo

401(k) Consultant

TPS Group
(Telecommute / North Haven CT)

TPS Group logo

Retirement Plan Administrator

RSW & Associates
(CT / NJ / NY)

RSW & Associates logo

Director of 401(k) Implementation, Core

Human Interest
(Telecommute / Mill Valley CA)

Human Interest logo

Free Newsletters

“BenefitsLink continues to be the most valuable resource we have at the firm.”

-- An attorney subscriber

Mobile App image LinkedIn icon
Twitter icon
Facebook icon

BenefitsLink > Q&A Columns >

Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Predecessor Employer 'Facts and Circumstances'

(Posted January 4, 2017)

Question 334: I have a client who wants to avoid predecessor employer status under the 415 regulations. Client and spouse own 100% of Company #1. They form a new Company #2 and own less than 50%. The businesses will be in the same field (advertising) but the DB Plan of Company #1 will be terminated so Company #2 will not maintain the plan of Company #1. All the employees of Company #1 (5 total) will become employees of Company #2. Would this be just a technical change under the "facts and circumstances" language?

Answer:

There are two ways a company can be a “predecessor employer” under Treas. Reg. §1.415(f)-1(c). The first is that the sponsor maintains the plan of the predecessor. You have ruled that out. The second is the "facts and circumstances" test:

[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. This will occur,  for example, where formation of the employer constitutes a mere formal or technical change in the employment relationship and continuity otherwise exists in the substance and administration of the business operations of the former entity and the employer.

The problem with a facts and circumstances test is: it’s facts and circumstances. We don’t have bright lines. And you’ve given me a whopping three facts to work with:

  1. All the employees of the old business will be employees of the new business,
  2. They will be in the same business field, and
  3. Majority ownership will be different.

Obviously, the first two facts suggest the old company is a predecessor. As for the third fact, ownership, remember that the "poster child" case for predecessor employer status is Lear Eye Clinic, Ltd. v. Commissioner, 106 T.C. 418, 425-429 (1996), where there was a new 49% shareholder. I’m not sure giving an additional 2% to the new shareholder should make that much of a difference. For a discussion of the Lear Eye Clinic case, see Q&A 282.

Of course, there is so much to consider outside of those three facts. Is the new business operating at the same location? Is it keeping the old clients and business relationships? What is there about the arrangement that would suggest this is truly a different company?

Obviously, this question is worth a great deal of money in contributions and benefits. It is worth a careful professional review by counsel. For further discussion of the predecessor employer rules, please see Q10:10 of my book, Who's the Employer.


Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.


Copyright 1999-2017 S. Derrin Watson
Related links:

(restricted access)

(restricted access)

© 2021 BenefitsLink.com, Inc.