A change in ownership is not material if the prior owner(s) continues to own one half or greater interest after the change in ownership. A change in ownership that is not material does not require an examination of potential changes in employees or operations. (Learn more about When Less Than The Entire Risk Is Sold.) Transfers of ownership between members of an immediate family member (parent, spouse, registered domestic partner, child, stepchild, grandchild or grandparent) are not considered material. In the event of a change in ownership that is not material, the historical payroll and loss experience stays with the entity.
Non-Material Change in Ownership Examples
Oscar's Oysters Incorporated is owned by Howard (75%) and Lily (25%). Lily sells her 25% to Edna. Since Howard had a 50% or greater interest both before and after the sale, the change in ownership is not considered material and Oscar's Oysters Incorporated will retain all of its historical payroll and loss experience.
Gilbert and Gracie each own 50% of a racetrack. They sell the racetrack, and Gilbert buys a farm, and Gracie buys a motel. The historical payroll and loss experience from the racetrack will follow Gilbert and will be applied to his farm. Similarly, the same historical payroll and loss experience will follow Gracie and apply to her motel. Since they each owned a one-half or greater interest in both the old entity and their respective new entities, they will retain all their historical payroll and loss experience.
Changes in ownership that are not material frequently have an impact on whether or not entities are combinable for experience rating purposes. When the change results in two or more previously combinable entities no longer being combinable, the entire experience developed by the risk is duplicated and used in the experience modifications for each of the separate entities after the change. See California Workers' Compensation Experience Rating Plan—1995, Section IV, Rule 2, Paragraph 5.
Impact on Risk Example
Tom and Jerry each own 50% of Tom's Hardware, Inc. and Jerry's Hardware, Inc. Tom sells his share of Jerry's Hardware, Inc. to Jerry and Jerry sells his share of Tom’s Hardware, Inc. to Tom. Since the change in ownership was not in excess of 50%, it is not material and no change in status analysis is necessary. However, after the ownership change, the two corporations no longer share in excess of 50% common ownership and are thus no longer combinable for experience rating purposes. In this case, all of the historical payroll and loss experience generated prior to the ownership change is applied to each of the entities.
In the example above, the changes in ownership resulted in the two entities being no longer combinable. As a result, all of the experience developed prior to the ownership change would be duplicated and assigned to each of the entities.
Insurers, agents and brokers can log into WCIRB Connect® and use the Ownership Information Submission tool to notify the WCIRB of a change in ownership. The WCIRB no longer accepts ownership information submitted using WCIRB Form 601, Notification of Change in Ownership and/or Combinability of Entities Form. Learn more about the Ownership Information Submission tool on WCIRB Connect.
We welcome your feedback on this guide. Please send comments and suggestions to [email protected].