Predecessor Employer Fundamentals
Rev. 11/16/07, E-mail Alert 2007-15

There a certain basics such as if the predecessor employer is a related employer, then the employer must count the service with the predecessor employer if the acquiring employer is going to maintain the predecessor’s plan. This article will present some of the rules. Future articles will present further rules.

An employer is treated as maintaining the plan if it agrees to become the successor sponsor of the plan or if it merges the predecessor plan into its own plan. Further, maintaining the predecessor’s plan also includes certain transactions in which the acquiring employer accepts trustee-to-trustee transfers from the predecessor’s plan.

A plan document may define Predecessor Organization. For example, in our new document, we state:

An employer that previously employed the employees acquired by the current Employer. The determination of whether a prior employer is a "predecessor organization" shall be determined in accordance with Code Section 414. The Employer may grant optional crediting of predecessor service pursuant to Code Section 414(a)(2) and the Regulations issued thereunder.

A plan document or adoption agreement may also permit the naming of unrelated employers as predecessor employers. Thus, a predecessor employer does not have to be a related employer or a company that was acquired and merged into the company. Rather it can be any employer that is designated in the plan document. For example, an employer owns a store in a mall and likes to hire employees from one of the anchor stores, perhaps because they are well trained there. Thus, the employer may list that other store as a predecessor employer.

NOTE: Of course, an employer should not use the predecessor employer provision to name a firm from which only one employee will be hired in an effort to waive eligibility for that one employee. This often happens when hiring an HCE. That would be a misuse of the predecessor employer provision that the IRS would find to be discriminatory.