Plan Accordingly for Mid-Year Mergers, Acquisitions
Organizational change is inevitable for a business. Often, change within an organization occurs in the form of either a merger or an acquisition. A merger occurs when two separate legal entities come together to form one company. There is at minimum a dissolution of one of the companies with the other company remaining. Sometimes both companies dissolve in order to form a new company altogether. An acquisition occurs when a company buys either an entire company or a division. In an acquisition, the acquired company or division remains whole at the time of acquisition. Regardless of the type of change a company undergoes, those decisions are almost always made at the highest level of management without any input from the payroll department. Then, when the merger or acquisition occurs in the middle of the year, even more complications occur.
By the time payroll is made aware a change is happening, the decision at times already has been made. Sometimes there is only a small window of time that payroll has to consider all the ramifications of the changes from employee payment and tax perspectives. This may cause penalties and interest on tax accounts or leave tax savings on the table.
Due diligence is always a part of merger and acquisition activities. Part of an organization’s due diligence needs to include a payroll professional on the team working on the merger or acquisition at the onset of planning. This allows the payroll person to assess the choices for moving forward and provide insight from a payroll perspective as to how the company can proceed in an effort to minimize costs and—most importantly—avoid penalties and interest. A payroll professional will assess the type of merger or acquisition taking place to determine key factors related to Form W-2 reporting and employer taxation. While each process may have its own nuances, most organizational changes fall into one of the following three situations.
One Company Fully Acquired by Another
The simplest form of mergers and acquisitions is when one company is fully acquired by another company and remains intact. With this form of change, the acquired company becomes a subsidiary of the acquiring company. There are then typically few changes with employment tax or W-2 reporting. The acquired company maintains its federal employer identification number and continues functioning in the manner it did before the acquisition. Generally, employer taxable wage bases (for social security and federal and state unemployment tax) do not restart. The employees receive a Form W-2 from the acquired company as they would have had the acquisition not taken place. A system change may be necessary to align the acquired company within the new company, but no major reporting is necessary to the tax jurisdictions. Reporting is necessary though if there is a change in leadership requiring the directors and officers to be updated for authorization purpose.
One Company Remains After Merger
Another form of organizational change is a merger whereby only one company remains after the transaction is complete. Just as with an acquisition as a subsidiary, there is generally no restart of employer taxable wage bases. But there are a few requirements with the tax jurisdictions. First, the surviving entity must report one Form W-2 for the year. No Form W-2 will be reported for the dissolved entity. Because the dissolved entity would have filed Forms 941 in the quarters prior to the merger under its own tax ID number, the surviving entity has to file a Schedule D (Form 941) to reconcile the single Form W-2 to the individually filed Forms 941 by both entities. If no reconciliation is filed, both entities will be out of balance. As all payroll professionals know, being out of balance at the end of a reporting period can cause years of back and forth between you and the tax jurisdiction to get the issue cleared up. It’s best to avoid this by ensuring all necessary paperwork is completed on time.
Each state has its own set of requirements regarding the reporting of an entity merger. It will be prudent that the payroll department conducts sufficient research within each state impacted by the merger to avoid subsequent penalties. The surviving entity is considered the successor, while the dissolving entity or entities are considered the predecessor(s). The successor assumes the past experience of each predecessor in a statutory merger. The process of reporting a predecessor/successor relationship helps to prevent the company from being charged with SUTA dumping. When the states combine the experience, a new rate will be issued for the surviving entity. In situations whereby the surviving entity only has past experience from one predecessor, the experience rate is simply transferred as is with a new account number for the successor.
It is extremely important the accounts for the predecessor are closed. Be sure to retain the confirmations from each of the states that the accounts have been closed as well as information related to how the state handled the merger. Upon receipt of the closure and account transfer paperwork, ensure all information has transferred and that the transfer date is consistent with the merger transaction. Contact the agencies to correct any erroneous information as soon as the information is received. Failure to correct any errors may cause lingering issues when subsequently filing.
The last type of organizational change is a partial acquisition in which an entire division of one company is sold to another company. This is similar to a merger except the selling company does not dissolve at the time of the change transaction. This could occur in situations where companies are looking to offload just a single line of business. Under these circumstances, the successor has the option of either issuing a single Form W-2 following the process outlined above or having the employees receive two Forms W-2—one from the predecessor and one from the successor. Regardless of the Form W-2 method chosen, employer taxable wages generally do not restart. The state taxation process will depend upon the state. For newly added states as a result of the division acquisition, many states allow the successor to choose whether to obtain a new employer rate or transfer the experience from the predecessor. The decision as to which rate to choose should depend upon what is best for the companies involved. When a partial acquisition takes place, the predecessor and successor must work closely when reporting the change to ensure that the same information is being presented on the individual change of business forms or letters.
There are a lot of considerations when embarking on an organizational change. While it may seem a daunting task, mid-year mergers and acquisitions can go smoothly. The important aspect in all of this is to plan accordingly by doing the following:
- Ensure a payroll professional is involved from the start
- Understand both the prior and post-change organizational structure including leadership structure
- Determine any system needs for the move of employee payroll data
- Conduct exhaustive research on the impacted states
- Develop a timeline for completion of all tasks
- Close any unnecessary accounts after the change
- Communicate as necessary with impacted employees
While we all keep our fingers crossed that mergers and acquisitions occur at the beginning of the year, we know that is not always the case. As such, it is important to be well versed in the steps necessary to facilitate a merger or acquisition in any circumstance.
Tamika Carden, CPP, is Payroll Account and Tax Administrator for Federal-Mogul Holdings Corporation and is also a member of PAYTECH’s Board of Contributing Writers.