Attorney Jonathan J. Siebers tackles the subject of Unemployment Tax clearances and issues surrounding business transactions in the latest Dual Business Meeting hosted by the Michigan Business Brokers Association. Takeaways: The basics of unemployment successor liability The UIA Forms COBRA

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

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

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

16. 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.

17. 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.

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