Effective July 1, 1986, three rural western Kentucky school districts – Muhlenberg
County School District, Central City Independent School District, and the Greenville
Independent School District – consolidated into one post-consolidation district called
the Muhlenberg County School District, which, although keeping the name and employer
identification number of the old Muhlenberg County school system, considered itself
a new entity.
The newly consolidated Muhlenberg County School District assumed all the assets and
liabilities of the three pre-consolidation school districts, including contractual
obligations. Each of the pre-consolidation school boards was given representation
on the post-consolidation school board, and the teachers of the three pre-consolidation
school districts had no interruption of employment, no termination, no transfer and
retained their continuing contract status. For these reasons, the post-consolidation
Muhlenberg County School District did not consider the employees of the pre-consolidation
school districts as being new hires to be covered under the mandatory Medicare provisions.
The U.S. Government, on the other hand, viewed the old Muhlenberg County school system
as continuing to exist after the consolidation but considered the Greenville and Central
City school systems to have been dissolved and held that the former Greenville and
Central City employees were new hires of the Muhlenberg County School district as
of July 1, 1986, and must be covered for mandatory Medicare and pay the requisite
taxes.
In its December 3, 1990 decision, the U.S. Court of Appeals for the Sixth Circuit
held that the language of the continuing employment exception did not expressly address
the results of a consolidation. After reviewing the legislative history of mandatory
Medicare coverage and the continuing employment exception, the Court sided with the
Muhlenberg County School District and concluded that it was not Congress’ intention
“to treat a merger or consolidation as creating a new employer” for purposes of IRC
Section 3121(u)(2)(C) because such treatment would create the same, sudden financial
burden on state and local governments that the exception was drafted to mitigate,
and would deter consolidation of local government entities for purposes of enhancing
efficiency.
Accordingly, the court held that the consolidated school system was not a new employer
for its post-consolidation employees, who in substance worked continuously for the
same employer under a different name.