Regardless of the reason for structuring a business in
this way, there are some complex IRS rules that must be considered when it
comes to the retirement benefits being offered.
During the mid-1980s, Congress created a series of
complex rules designed to prevent companies from transferring employees to
separate but related companies as a way to provide reduced or even no
benefits without running afoul of the nondiscrimination rules. Generally
speaking, those rules describe two types of related groups—the affiliated
service group and the controlled group. For the sake of brevity throughout
the rest of this article, we will occasionally refer to these as ASGs and
In short, these rules require that all companies in a
related group must be combined when performing annual nondiscrimination
testing on the retirement plan(s). While this requirement can be a
limitation at times, with some careful planning it can also be used to
provide retirement benefits to multiple companies more cost effectively than
if the related companies were treated as separate entities. Before we look
at some examples, it is first necessary to dive a little bit into the weeds
to understand the gist of the rules themselves.
The ASG rules focus on the nature of the relationship
between the entities in question. Some of the key variables in determining
whether an ASG exists include the following:
While ASG relationships can exist in many different
industries and entity types, it is not unusual for them to occur in
professional settings such as medical practices and law firms. Consider two
examples illustrating relatively common professional business structures.
A law firm is organized as a partnership and each
attorney creates his or her own professional corporation (P.C.). Rather than
the attorneys being the partners of the law firm, their respective P.C.s are
the partners. The partnership and the individual P.C.s join together to
provide legal services to the firm's clients. As a result, the firm and the P.C.s form an ASG.
Several physicians own a medical practice and they have
no other employees. However, they also own part of a billing office that
includes a number of employees who handle administrative functions for the
practice. Since the billing office provides services to the practice that
are customarily provided by employees, and there is some overlapping
ownership, the two potentially form an ASG.
The remainder of this article will focus primarily on
controlled groups. Unlike affiliated service groups, controlled group
determinations are based solely on overlapping ownership. There are two
general types of controlled groups—the parent/subsidiary group and the
This type of group is the more straightforward of the
two and exists when one entity owns 80% or more of another entity. For
example, if Company A owns 80% or more of Company B, the two companies are
part of a parent/subsidiary controlled group.
This type of group is a little more complicated to
explain. In broad terms, there are two thresholds to meet:
When both of these requirements are met, there is a
brother/sister controlled group.
As we described above, ownership is a key variable in
these determinations, and there is a series of additional rules that discuss
ownership. Specifically, there are instances in which the ownership held by
one person or entity must be attributed to another person or entity. While
we will spare you the gory details, it is important to briefly touch on
In simple terms, this essentially means that a person
who owns at least 50% of a business is deemed to own a proportionate share
of whatever that business owns. For example, if John Doe owns 75% of ABC
Company, and ABC owns 60% of XYZ Company, John is deemed to own 45% of XYZ
(75% x 60%). There are a number of variations and exceptions, but
remember…we promised to spare you the gory details.
This is when one person's ownership is attributed to
certain family members. Specifically, an individual's ownership is
attributed to his or her spouse as well as lineal ascendants and
descendants. In this case, we do need to journey a little further down the
rabbit hole to consider some of the very important exceptions:
Certain attribution to ascendants and descendants
extends only to one generation, while other times it extends to multiple
Assuming you've made it this far without either falling
asleep or running screaming from the room, it's time to look at some
examples that might pull all of this craziness together. We will do this
using a couple of simplified case studies, and our cast of characters will
include John, Paul, George, Ringo, Yoko (John's wife) and Julian (John and
Yoko's 18-year-old son).
Our characters hold the following ownership in two
At first glance, it does not appear that the same five
people own at least 80% of both companies. However, once we consider family
attribution, John's total ownership in Yellow Sub is 70% (30% direct +20%
attributed from Yoko +20% attributed from Julian). Together, John and Paul
own 80% of Beatlemania and 100% of Yellow Sub and their identical ownership
is greater than 50%, making the two companies part of the same controlled
John and Yoko each own 100% of Imagine, LLC and Silver
Horse, Inc., respectively, and neither one is at all involved in the company
owned by the other. Under one of the exceptions noted above, their ownership
would not be attributed to each other, so it appears there would not be a
controlled group. However, since Julian is under the age of 21, he is
attributed the ownership from each of his parents, making him the 100% owner
of both companies and causing the two to form a controlled group.
So, what does all of this really mean? Basically, it
means that when there is a controlled group (or an affiliated service
group), all of the related companies are treated as a single employer for
purposes of the retirement plan. In other words, the employees of all the
related companies must be included in the annual nondiscrimination testing.
That might sound onerous but it doesn't have to be.
Keep in mind that the annual testing compares the
benefits provided to highly compensated employees (HCEs) to those provided
to non-HCEs. If two companies in the same controlled group have similar
numbers of HCEs and non-HCEs, it is completely plausible that the tests
would still pass even if the employees of one of the companies don't receive
any plan benefits.
If the goal is to provide similar benefits to the
employees of several companies, a controlled group/affiliated service group
relationship can make it more cost-effective to do so. The reason is that
since all of the companies in the group must be treated as a single employer
for purposes of testing, it is perfectly acceptable to have a single plan
covering all of the employees. Through the use of more complex forms of
nondiscrimination testing, it might even be possible to provide different
benefits to the various companies in the group via a single plan. That means
only one plan document to maintain, only one plan to administer and only one
Form 5500 to file each year.
Before considering how to plan around/take advantage of
related group status, the first step is to be sure which companies are/are
not “related” based on the rules we have highlighted in this article. There
are many facts and circumstances that can affect controlled group and
affiliated service group determinations and even seemingly slight nuances
can be game changers. As a result, it is usually worth spending a few
dollars to hire someone who is knowledgeable and experienced in this area to
assist with the analysis.
With some due diligence and careful planning, your
controlled group can be under control rather than out of control.
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intended to provide general information on matters of interest in the area
of qualified retirement plans and is distributed with the understanding that
the publisher and distributor are not rendering legal, tax or other
professional advice. Readers should not act or rely on any information in this
newsletter without first seeking the advice of an independent tax advisor such
attorney or CPA.
© 2013 Benefit Insights, Inc. All rights reserved.
The purpose of the new disclosure requirements is to ensure participants and beneficiaries have access to adequate information to enable them to comparison shop among investment options to make informed investment decisions.
Below is a general overview of the regulations' key disclosure requirements that become effective in 2012.