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Assuming liabilities on acquisition- maybe?

edited August 2010 in General Payroll Topics
Peeps, it has already been a 60-hour workweek for me and my brain is beyond fried. Would you lovely folks mind reality checking me on my thinking around an acquisition?

We just bought a company and are bringing employees on board September 15th (mid-quarter- yuck. Guess who had no say in THAT date?). It was done as a stock transfer, so we are assuming all liabilities. Ordinarily, this would mean we'd preserve all employee info/ dates, and convert all QTD and YTD values as well as check detail for the year as we'd be doing the 941s and W2s. Not too weird yet, right?

Here's where it gets funky: while it was done as a stock transfer and all company liabilities for the FEIN were assumed- that FEIN had no employees. The company we purchased had wholly outsourced to a PEO; the "employees" doing the work of the company we now own were actually employed by this 3rd party and paid under the PEO's FEIN.

And here is where my question comes in for the reality check: I'm thinking that the liability assumption only applies to the FEIN we now own; while we can choose as a company to preserve all employee dates, the payroll reality is that we won't be assuming the QTD and YTD values- from a payroll perspective they are new EEs and they start over on withholding, and will end up with 2 W2s for 2010- one from the PEO and one for us. Right?

Thanks for helping me think!


  • rrupertrrupert ✭✭✭
    When we converted out of the PEO, all our numbers restarted at zero/default. Our state unemployment tax rate started at the default (higher) rate. All of SS limits started over, etc. Luckily we did it at the beginning of a calendar year, but it is my understanding that had we done it any other time that yes, everything would have started over. We got no credit (good or bad) from the PEO. I think part of it had to do with the different FEINs.

    And actually it is easier to start over because they are pretty much new employees except possibly for some service creditting on some benefit plans....for example if you transfer the 401k plan out of the PEO, it is possible that it would NOT be a distributable event unless you do a plan termination. If you were just part of a larger PEO plan, they probably won't let you do a termination. If they don't start over, then yes, you would have to do QTD and YTD loads of information. Not fun.

    But acquisitions can get really sticky and different states might have different criteria. I suggest checking with legal counsel to make absolutely sure.
  • Thanks David and Ruth. Good to know that your gut instinct/ experience matches where my head was taking this. I tried asking Legal. I tried asking some of the higher-up CPAs in Accounting. The answer I got from everyone was along the lines of, "How should we know? That's Payroll's job." Ugh. People. To David's point about supporting an exception- well, no one ever got penalized for playing it safe and starting over, so I'm all for the fresh start. I think as long as I verify with the PEO that they have no expectation (erroneous or otherwise) that we file anything for the first part of the year, we're probably clean...
  • As David indicated, there were a couple of discussions – this one had to do with getting ADP to suppress the predecessor W-2 and the Form 941 reconciliation. Not sure if that particular cite to Rev. Proc. 2004–53, SECTION 5. ALTERNATE PROCEDURE FOR PREDECESSORS AND SUCCESSORS will be of any help.


    I’m not sure this one would be of much help either.


    This one is closer to your situation, but here they are simply going from PEO to in-house – that is, they are hiring their “temps”. You are acquiring all the assets of one business and acquiring the employees of another business – maybe.


    If it is not too late, can you continue the PEO through the end of the year? That might be the easiest thing to do since this was a stock transfer. The other possibility is that the employees might be considered employees of the company acquired - I'm not sure how that works - there was also a discussion of stock transfers v. asset acquisitions and successor employer - I'll see if I can locate that again.
  • I'm thinking a stock acquisition would not require a change in who the employees work for. In fact, the EIN would follow the stock - Where the stock remains with the original shareholders and the company sells the assets (leaving cash in a shell organization) you might have more of a transfer of employees between organizations. My thinking was simply that it might be less expensive to stay with the PEO though the end of the year and also be less disruptive in general during the transition period. Then you don't have to worry about showing that acquisition qualifies for successorship.

    Hey David - I'm not sure I know more - but I did research the issue recently - on the W-2 reporting end more than anything else. I like your comment about EY "quietly changing the instructions". :wink:
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