Tax Credit for Acquired Plans

I apologize in advance for my ignorance, but I haven't had this question come up before. A company acquired an existing 401k plan (stock purchase). Can the new company get the tax credit (as if it were a new plan, new company)? There is a new EIN, new trustees, etc., but the same, existing plan.  

Also, this company plans to purchase other companies soon, but they plan to have them terminate their existing plans (if applicable), as part of the purchase agreement. They would then add them (as controlled groups) to the current plan. (Same 1 owner (and spouse) on all companies.) In those instances, can they get the tax deduction for each and every new company as they are established?

I’m just spitballing here, but I’m going to say it’s a no for all your various scenarios. 
 

None of them are new plans. 

Thanks Bill.  That was my initial thought as well.  The CPA was asking, and at first I said that since it was an existing plan, I didn't think it wouldn't qualify.  But then I started second guessing myself, since it's a new EIN applied to the plan.  So I was hoping someone has run into this and could confirm (or rebut) our thinking.

What if they buy a new company, start up a plan for that company, mirroring the current plan (same provisions, same investment company, same investment options, etc.)?  And they do that for each and every company?  Then I would think, yes for those companies... but at what cost?  Would the credit be enough to offset the start up costs, separate valuations, combined testing, multiple 5500's, etc.?  (I haven't done the math.  To use Bill's term, I'm just spitballing here... lol.)

And to take it even further... What if they set up new plans for all the new companies going forward, and then after the tax credit phases out, merge the plans into one plan as long as you don't have anti-cutback issues?  (I just know this will be their next question.)

TIA!

IRC 45E(c) defines who is an "eligible employer" for purposes of the credit:

Quote

(c) Eligible employer. For purposes of this section--

(1) In general. The term "eligible employer" has the meaning given such term by section 408(p)(2)(C)(i).

(2) Requirement for new qualified employer plans. Such term shall not include an employer if, during the 3-taxable year period immediately preceding the 1st taxable year for which the credit under this section is otherwise allowable for a qualified employer plan of the employer, the employer or any member of any controlled group including the employer (or any predecessor of either) established or maintained a qualified employer plan with respect to which contributions were made, or benefits were accrued, for substantially the same employees as are in the qualified employer plan.

Paragraph (2) excludes employers which are a member of a controlled group if there was another plan in that controlled group covering "substantially the same employees." Presumably, if the plan being adopted for the newly-acquired company covered a separate group of employees, then the credit could still be allowed.

I'll admit that my initial reaction was the same as Bill's - that you couldn't get the credit multiple times just by adopting multiple plans. However a closer reading of the statute seems that it might not be impossible after all.

I wouldn't want to be the one making the call on this though. Pass this code section off to the accountant and let them interpret it. Or maybe they have a tax attorney consulting on all these acquisitions? They could hopefully offer an opinion.

If they are doing multiple acquisitions, remember that they have to stay under 100 employees across the entire controlled group in order to be eligible for the credit at all.

Attached is a very well written explanation of the start-up plan tax credits.  It does not answer 100% of all questions, but does provide a good summary of points to consider in deciding in the credits are available.

In Zoey's initial case, it is not likely that a credit can be claimed because the plan is not a new plan.  There are two plausible scenarios about how the plan of the acquired company was handled and neither leads to the plan being a new plan.  This was a stock transaction so the seller's plan survived and became an existing plan sponsored by the buyer (or a member of a controlled group of the buyer).  If the EIN change was made to reflect the EIN of the buyer as the plan sponsor, that change would be reported on the 5500 or 5500SF on line 4 as a change in EIN.  If the buyer set up a new plan and merged the seller's plan into the new plan, then the merger would be reported when the assets were transferred from the buyer's plan to the seller's new plan.  This latter scenario is a more plausible argument for trying to take the credit, but given the facts is not likely to succeed. 

If the buyer's plan was kept separate and apart from the seller's plan, the buyer's plan could have a plausible argument to taking a credit for the buyer's plan.

The strategy of creating new plans for each seller's plans going forward likely will become unavailable fairly quickly as the buyer's employee count grows.  The tax credit is available to small businesses, not small plans.  The tax credit starts phasing out between 50 and 100 employees.

I suggest paying careful attention to the rules where the seller has made contributions to a SIMPLE or SEP IRA.  It is easy to overlook these arrangements in planning for an acquisition.

Changing topics from tax credits to auto enrollment/escalation, if the acquiring company established (or added) a new 401(k) feature on or after December 29, 2022, the plan needs to implement auto enrollment/escalation starting in 2025.  There are rules in Notice 2024-02 about grandfathering plans of acquired companies that did not have a 401(k) feature prior to SECURE 2.0 enactment.  This is an equally vexing topic to consider in doing mergers.

tax_credits_under_secure-2.0-easy_reading_version_from_gps-2023-02.pdf

CB, thank you for the cite. That's very helpful.  I agree, and I had already mentioned the 100 participant rule.  The problem with putting it back on the CPA is that they are telling the client that it is up to the TPA to determine, and we have told the client it's up to the CPA to determine.  I too, do not want to make that determination... lol.

Paul, that IS very well written. This was the first company purchased for this owner (so no controlled group yet), but he is looking to buy more soon.  Very good point on the SIMPLE or SEP, and the auto-enroll!  Thanks!  And thanks for giving me more to think about... GAH!