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:

All the employees of the old business will be employees of the new business,

They will be in the same business field, and

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.

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