Successor Liability Issues Unemployment and COBRA April 25

Successor Liability Issues – Unemployment and COBRA April 25, 2014 By: Jonathan J. Siebers

Overview of Presentation • The Basics of Unemployment Successor Liability • The UIA Forms • COBRA

The Basics of Unemployment Successor Liability • Pursuant to the Michigan Employment Security Act (MESA) a buyer of a business is a successor employer if each of the following is true: – The Buyer acquired 75% or more of the assets of the seller; and – Either: • The buyer has acquired and used the trade name or goodwill of the seller; or • The buyer has continued or within 12 months of the transfer resumes all or part of the business of the seller in the same establishment or elsewhere. • So, if you acquire less than 75% of the seller’s assets, exclude trade names and goodwill from the sale, or cease operating the business of the seller for a period of 12 months after the closing, you are not a successor employer.

The Basics of Unemployment Successor Liability • A successor employer is liable for delinquent unemployment contributions and interest due from the seller. • Liability limited to value of assets acquired less amount of debt secured by such assets, that is entitled to priority. • Buyer can request from the Unemployment Insurance Agency (UIA), not less than 10 days prior to closing, a certified statement of the seller’s liability to UIA. • Such buyer cannot be held liable for more than the amount certified by UIA.

The Basics of Unemployment Successor Liability • A successor employer that acquires 100% of the seller’s assets also inherits all of the seller’s experience account with the UIA. That includes all of seller’s tax payments, and benefits charges, and rate.

The Basics of Unemployment Successor Liability • A successor employer that acquires less than 100% of the seller’s assets inherits a portion of the seller’s experience account with the UIA.

The Basics of Unemployment Successor Liability • When the successor employer is an existing employer (i. e. , an ongoing business with a rate of contribution, if the closing is effective on or after January 2, the buyer’s unemployment rate and history will not change for the year in which the sale closes. • However, in the year following the year in which the sale closes, the successor employer’s rate will change. The successor employer’s new rate will be a combination of its historical rate and the historical rate of the seller. • So, if you close a deal from now through the end of 2014, if the buyer has a rate of contribution, the buyer’s unemployment history and rate will not change for 2014, but will change to the combined rate in 2015.

The Basics of Unemployment Successor Liability • If the seller’s rate is equal to or lower than the buyer’s rate, the combined rate should be a good thing for the buyer. However, if the seller’s rate is higher than the buyer’s, the combined rate would be higher than buyer’s current rate. • Thus, again, prior to closing, the buyer, with its attorney and CPA, should work to determine if possible what that combined rate would look like. Keep in mind that a brand new business would have a rate of 2. 7%, so if the buyer entity was formed for the acquisition and did not have a prior unemployment history, any seller rate over 2. 7% will result in an increased combined rate to the buyer. • When the successor employer has no rate of contributions (i. e. , the buyer entity was formed for the purchase of the seller’s assets), the successor employer, beginning the first day of the quarter in which the transfer occurs, is assigned the seller’s contribution rate.

The Basics of Unemployment Successor Liability • If the seller fires its employees at closing, and the buyer fails to hire all of them, the seller employees that are fired and not rehired will typically be entitled to receive unemployment benefits. • The first two weeks of those benefits are paid by the seller. After that, the benefits are paid by the buyer. However, the successor employer inherits the seller’s reserve account, so any unemployment payments with respect to the seller’s employees should be paid out of the reserve account inherited by the buyer. • In other words, if the seller is current on its unemployment contributions, the unemployment payments owed to the seller’s employees who have not been rehired should result in no out of pocket cost to the buyer. • So, prior to closing, the buyer, with its attorney and CPA, should determine whether the seller’s reserve account has sufficient funds to pay all unemployment benefits payable as a result of the transaction.

The Basics of Unemployment Successor Liability • Where a buyer is buying less than 75% of the assets of the seller, or is otherwise not considered a successor employer, the buyer can still voluntarily elect to become a successor employer. • This would make sense in a situation where the buyer has a high unemployment rate and the seller has a low unemployment rate, thus resulting in a combined rate that is better than the buyer’s current rate.

The UIA Forms • UIA 1027 – Business Transferor’s Notice to Transferee of Unemployment Tax Liability and Rate – The form is required when the buyer is purchasing the business or 75% or more of the assets of the seller. – The form must be given to the buyer not less than 2 business days before the seller accepts the buyer’s offer to purchase. – The obligation to provide the form rests with the seller, the seller’s real estate broker or other agent or attorney.

The UIA Forms • UIA 1027 – Business Transferor’s Notice to Transferee of Unemployment Tax Liability and Rate – The information on the form must be current. Providing incorrect information is a misdemeanor punishable by up to 90 days imprisonment and/or fine of up to $2500. – Real estate broker or other agent representing seller is also liable to the buyer for consequential damages if form not given with correct information. – No liability for consequential damages if the real estate broker or other agent acted in good faith. – A completed UIA 1027 can be obtained from the UIA upon 2 weeks’ prior request. Otherwise, the seller and its CPA need to complete the form.

The UIA Forms • UIA 1395 - Clearance of Account – This form is obtained from the UIA. – It may be requested by the seller or the buyer. – Must be obtained not less than 10 days before the closing. – The UIA certifies the tax liability of the seller as of the date of the certification, and the buyer cannot be held liable for any amount of unemployment contributions/taxes due from the seller in excess of the amount so certified.

COBRA • The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) requires certain group health plans to offer continuing coverage to a plan participant after the participant’s employment has been terminated. • If the seller in a stock or asset sale has a group health plan that is subject to COBRA, the buyer needs to consider whether it will have any successor liability for the seller’s COBRA obligations.

COBRA • In a stock sale, the employer entity typically remains the same, and thus the entity will remain on the hook for its own COBRA obligations.

COBRA • In an asset sale, if the seller continues to maintain a group health plan following closing, the buyer has no COBRA obligations with respect to the seller’s employees. • However, if the seller does not continue to maintain a group health plan following closing, the buyer may be liable for the seller’s COBRA obligations. • The critical determination is whether the buyer “continues the business operations of the seller without interruption or substantial change. ” • Unfortunately, there are few court cases to help guide what it means to continue operations “without interruption or substantial change, ” so each transaction must be considered on its own set of facts.

COBRA • If the buyer does continue such operations, the buyer is liable for the COBRA obligations of any seller employees receiving COBRA at the time of the closing, and of any seller employees who become entitled to COBRA as a result of the transaction. • So, the buyer would have to provide COBRA coverage for employees terminated by seller before the closing if the employees were receiving COBRA as of the closing date, and for employees who were terminated as a result of the asset sale and not rehired by the buyer.

Questions? Jonathan J. Siebers jsiebers@shrr. com (616)-458 -5298