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|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?|
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:
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:
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.
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.