While state unemployment insurance (”SUI”) taxes rarely drive a company’s decision relating to the structure of a merger, acquisition, internal workforce reorganization/restructuring, or divestiture (“M&A”) transaction, pre‐acquisition planning can help shape the timing and final organizational structure that can result in significant tax cost savings.
An acquiring employer has the responsibility, perhaps obligation, to request and obtain sufficient data from a selling employer to assess material concerns, mitigate SUI tax rate risk, and ease the payroll integration process once the transaction has closed.
Perform Due Diligence!
Due diligence is the investigation and discovery of opportunities, risks, and synergies associated with a transaction. From a SUI tax perspective, due diligence efforts should be strategically focused on areas that can have a material financial impact on an acquiring employer, such as:
- States with significant taxable payrolls
- SUI tax accounts with very high or very low SUI tax rates
- Assigned penalty tax rates and the reason for such rates
- Significant reductions in workforce
- Debits and/or credits on accounts and the reason for such adjustments
- Unreported historical M&A transactions
- Improper payroll reporting practices (e.g., reporting to incorrect state or under an incorrect legal entity)
Design a Plan to Minimize Risk…
Conducting a SUI tax rate impact analysis allows the acquiring employer to quantify the financial impact a transfer of experience (i.e., tax rate) might have on future SUI tax rates and related unemployment tax costs in the current and future years. The analysis enables the acquiring employer to assess:
- Available transfer of unemployment rating experience options (i.e., required, prohibited, or optional)
- Revisions to tax rates and when those revisions will become effective
- How revised rates will impact SUI tax costs
- Ability to change the effective date of the acquisition (e.g., 01/01 vs. 12/31) to obtain the best financial results
- Impact on existing and future statutory elections (e.g., voluntary contributions and joint accounts)
…and Maximize Tax Cost Savings
The language used in an acquisition agreement can have material financial implications to an acquiring employer. Such agreement language may influence:
- An acquiring employer’s ability to access a selling employer’s pre‐acquisition payroll tax records. By using the wages paid by the selling employer to determine when the acquired employees attain the annual taxable wage bases (for FICA, FUTA, and SUI), the acquiring employer can realize meaningful savings by not duplicating employment taxes.
- An acquiring employer’s ability to obtain a better SUI tax rate. By having the selling employer agree, pre‐acquisition, to any requests by the acquiring employer to transfer SUI rating experience, the acquiring employer can confidently make assumptions as to financial outcomes.
- An acquiring employer becoming responsible for the payment of undisclosed, contingent, or delinquent SUI tax liabilities of the selling employer.
Thomas & Company assists employers during the pre‐acquisition planning phase by reviewing and assessing data for material unemployment tax risks and potential opportunities.
To speak with one of our UI Tax Analysts related to an upcoming M&A transaction or internal workforce restructuring, please contact Josh Kendall at (615) 620‐1821 or via e‐mail.