M&A Tax Intelligence: SUI Compliance Risks
Is Your Business Taking Unnecessary SUI Compliance Risks During an M&A?
When an employer engages in activities that result in the movement of employees between legal entities (whether from an external M&A event or internal workforce restructure), there are mandatory state unemployment insurance (“SUI”) compliance filings that must be remitted to the State workforce agencies (SWAs). The primary purpose of the filings is to allow for the proper administration of SUI tax laws. They focus on the assignment of deserving SUI tax rates, good or bad. SWAs use sophisticated SUTA Dumping Detection Systems to identify unreported employee movements between legal entities. In 2017 alone, it identified over 3,000 transactions as incorrectly reported — or not reported at all.
This resulted in $23.4 million charged to employers for improper SUI compliance.*
As a deterrent for SUI non-compliance, the SWAs impose consequences, such as:
- Interest and penalties associated with delinquent tax contributions when a SUI rate is retroactively increased by the SWAs
- Assignment of penalty tax rates (e.g., maximum allowable rate for three years) for non-compliance
- Loss of successor treatment allowing acquiring employers to carryover SUI taxable wage bases during mid-year employee transfers
Real Case Examples
Here are three real case examples** of the financial impacts that employers can face when they are non-compliant. If handled correctly, you can see how a bad situation was turned around into a positive.
$720K Pennsylvania Penalty Rate Assessment
A Pennsylvania employer transferred certain business operations in the third quarter of 2014. This included 350 employees from OldCo to related NewCo. Unfortunately, NewCo failed to file the PA-100 (PA Enterprise Registration Form) to reflect the total transfer of SUI rating experience. After detecting the employee movement in October of 2018, the Pennsylvania SWA retroactively revised NewCo 2014-2018 tax rates. It imposed an additional 3% penalty tax rate for each year — resulting in an assessment of over $1.5 million.
How the Equifax Employment Tax Services Team Helped: We coordinated the efforts with NewCo and the SWA to help remove the penalty tax rates and abate interest. As a result, we drastically reduced the amount owed by $600,000. The Equifax ETS Team then identified an overpayment of $120,000. This was due to duplicated taxes associated with NewCo not carrying over the SUI taxable wage base.
$3 Million Spin-Off Recovery
On July 1, 2016, Industrial Corp. spun off a business unit by creating a newly liable company named TechnoCo. It included 2,800 employees. TechnoCo filed required compliance documents with the SWAs. Unfortunately, they failed to indicate that a related employer transferred the employees. New employer SUI tax rates were assigned to TechnoCo. The 2,800 employees were also treated as “new hires” effective July 1, 2016. Because of this, annual taxable wage bases were restarted for FICA, FUTA and SUI tax purposes. In the second quarter of 2017, TechnoCo received a notice from the Wisconsin SWA. They had identified a significant transfer of employees from Industrial Corp. to TechnoCo under the SUTA Dumping Prevention Act of 2004 and associated Wisconsin statutes.
How the Equifax Employment Tax Services Team Helped: As a result of the Wisconsin SUTA Dumping accusations, TechnoCo requested the Equifax ETS Team perform a full review of all compliance filings, resulting in over $3 million in refunds associated with rate revisions and taxable wage base duplications.
$1.8 Million Rate Revision Savings in Georgia
In January of 2015, Service Co. transferred 60 employees to System Corp. in the state of Georgia. Service Co. would continue to transition their Georgia workforce of 5,000 employees to System Corp. over the next two years. System Corp. was assigned a new employer rate of 2.70% for 2015. After a review of Service Co.’s 2015 Georgia tax rate notices, SWA discovered they had a reserve account balance of over $3.1 million.
How the Equifax Employment Tax Services Team Helped: The Equifax ETS Team coordinated with the SWA to file amended compliance filings, including an Application and Agreement for Partial Transfer of Experience Rating Record for the initial 60 employee transfer. SWA revised System Corp.’s 2015 tax rate to 1.20%. The Equifax ETS Team then continued to secure each of the experience transfers associated with the Georgia employee moves that occurred throughout 2015, 2016 and 2017. The System Corp. tax rate revision from the new employer rate to the proper experience rate resulted in $1.8 million in reduced SUI tax costs.
The compliance requirements associated with an M&A transaction can be complex and time-consuming, especially when employers deal with such events on an irregular basis. To help ensure upcoming and historical M&A activities have been reported correctly, our team of employment tax pros can provide assistance. We can also prepare a no-obligation LookBack tax review for you, which can help you discover potential overpaid or duplicated employment taxes that might have cost your business thousands of dollars. Sign-up for free.
*Employment and Training Administration (U.S. DOL) UI Handbook No. 401, Items 59 and 61 on the ETA 581 reports for CY 2017. **Companies names have been changed
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