Chapter 1 Flashcards
What are the three basic types of controlled groups?
Parent-subsidiary group; Brother-sister group; and Combined groups.
To what does IRC Sec 414(b) refer?
Governs corporations under common control.
To what does IRC Sec 414(c) refer?
Governs all other entities under common control (including sole proprietorships partnerships limited liability companies tax-exempt entities and any other organization conducting a trade or business.)
When does a parent-subsidiary group exists?
When one business (common parent) owns at least 80% of the voting stock or value of the stock of one or more other businesses (subsidiaries). Common with larger corporations.
Is it possible for a company to have multiple subsidiaries or multiple tiered subsidiaries that constitute a single controlled group?
Yes
May a parent-subsidiary group exist when the parent is a foreign company?
When a foreign parent owns 80% or more of two or more US subsidiaries.
When would a foreign company have a limited impact on any testing?
If most or all of their employees are likely to be excludable as nonresident aliens. For this purpose to be a nonresident alien must receive $0 in US income.
How many common owners must satisfy the ownership tests in a brother-sister controlled group?
5 or fewer
How much controlling interest/common control must be satisfied in a brother-sister controlled group?
80%
How much effective control must be satisfied in a brother-sister controlled group?
50%
Who qualifies as a common owner in a brother-sister relationship?
Individual trust or estate.
When is an owner ignored for testing purposes in a brother sister relationship?
When an owner does not own directly (or indirectly) some stock in each business as per U.S. v Vogel Fertilizer (1982)
When can combination parent-subsidiary and brother-sister groups exist?
When the parent in the parent-subsidiary group is the common member in the brother-sister group.
When is a combination not considered a combined controlled group?
If the subsidiary in a parent-subsidiary group is a common member of a brother-sister group.
Is it true that a foreign parent or subsidiary does not need to be included in a combined group?
No a foreign parent or subsidiary must also be considered.
What is attribution and when does it occur?
Concept of treating a person or business as owning an interest in a business that is not directly owned by the person and may occur due to a family relationship or a business relationship.
For purposes of determining whether a controlled group exists which attribution rules should be used?
IRC 1563
What does spousal attribution specify for purposes of determining a controlled group?
An individual is deemed to own stock owned by spouse unless legally divorced or separated by decree.
For the controlled group rules what conditions if met create an exception to spousal attribution?
All of the following must be satisfied:
- No direct ownership in spouse’s business
- Not a director not an employee and does not participate in management of spouse’s business.
- No more than 50% of gross income from spouse’s business derived from passive income.
- No distribution restrictions of spouse’s stock in favor of the spouse or minor children. (Be aware that distribution restrictions other than to a current co-owner are very rarely found and must be specifically included in the company’s charter or operating agreement for this provision to apply). Attribution to a minor child may still result in a controlled group even when the spousal exception applies.
What nullifies the exception to spousal attribution for the controlled group rules.
Community property interest nullifies this exception because community property ownership = direct ownership
Describe the 3 types of family attribution other than spousal attribution for the controlled group rules.
1) Minor child - Parent is deemed to own the stock of a minor child (under age 21); conversely minor child is deemed to own the stock of parent.
2) Adult child - Parent is deemed to own the stock of an adult child (age 21 and older) only if the parent owns (or is attributed as owning) more than 50% of the stock of the company. Conversely an adult child is deemed to own stock of parent if adult child owns (or is attributed as owning) more than 50% of the stock of the company.
3) Grandchild - Grandparent is deemed to own the stock of a grandchild only if the grandparent owns (or is attributed as owning) more than 50% of the stock of the company. Conversely a grandchild is deemed to own the stock of a grandparent if the grandchild owns (or is attributed as owning) more than 50% of the stock of the company.
Which attribution applies between siblings for controlled group purposes?
None
What criteria rules attribution from a corporation to an individual for cg rules?
If a corporation has an ownership interest in another organization that interest is attributed to any person who owns 5% or more of the corporation. The person is deemed to own a pro rata share of the stock owned by that corporation.
For controlled group definition stock owned by an IRC ?401(a) qualified plan exempt from tax under IRC Sec 501(a) is attributed to whom?
The participants of the plan. However if the stock attributed from the qualified plan to the participant meets the definition of excluded stock discussed below the attribution of ownership of such stock might end up being disregarded.
What criteria rules attribution from a partnership to an individual for cg rules?
If an individual owns at least 5% of the capital or profits of a partnership then he is deemed to own a pro rata share of any organization owned by that partnership.
How is that pro rata portion determined for each partner when attributing ownership for cg rules?
By multiplying the greater of his capital or profits interest by the interest the partnership has in the other organization.
What criteria rules attribution from estates and stocks to an individual for cg purposes?
Stock owned by a grantor trust is owned by the ‘deemed owner’ under trust rules. The beneficiary of a trust with at least a 5% actuarial interest in the trust is deemed to own a pro rata share of the trust’s stock.
What criteria rules attribution from options to an individual for cg purposes?
If someone owns an option to buy company stock then he is treated as owning that stock.
What stock is not included under IRC 1563 for determining parent-subsidiary Controlled Groups?
- Nonvoting preferred stock;
- Treasury stock;
- Ownership held by a deferred compensation plan (qualified or non-qualified);
- Certain interest held by a subsidiary;
- Restricted stock; and
- Tax-exempt organization interest.
For what purposes are members of a controlled group treated as a single employer?
- General qualification rules under IRC 401(a); Nondiscrimination rules of IRC 401(a)(4);
- Compensation limits under IRC 401(a)(17);
- Eligibility coverage and service crediting rules under IRC 410; Vesting and service crediting rules under IRC 411;
- Contribution and benefit limits under IRC 415;
- Top-heavy rules under IRC 416; and
- SEP/SIMPLE rules under IRC 408.
When must compensation from all entities must be aggregated?
Prior to determining HCEs. If someone is determined to be an HCE of one entity then he is an HCE of all related entities. Loans from all plans of the controlled group must also be aggregated to apply the loan limitations under IRC 72(p) (e.g. the $50,000 level).
When under IRC 415(h) for purposes of IRC 415 limitations does a parent-subsidiary group exists?
If the parent company owns more than 50% of the subsidiary company (rather than at least 80%).
To which cg type does IRC Se 415(h) not apply?
Brother-sister groups
What happens if the controlled group members participate in the same plan?
They are aggregated for computing the deduction limit. Meanwhile the allocation of the deduction is on an employer-by-employer basis. For pension plans minimum funding under IRC 430 provides that each member of the controlled group has joint liability for the minimum funding amount.
What is an affiliated service group (ASG) and where are they commonly observed?
Consists of two or more organizations that have a service relationship and in some cases an ownership relationship. ASG members are generally in fields of service organizations (health law engineering architecture accounting etc.) or organizations where capital is not a material income-producing factor.
Under ASG rules are banks and other financial institutions considered to be service organizations?
No
What are the three categories of ASG?
1) A-Org group
2) B-Org group
3) management group
All ASGs must included what?
A first service organization (FSO) and one or more A-Organizations (A-Orgs) and/or B-Organizations (B-Orgs).
Which ASG is the exception?
Management groups
What makes up A-Org groups and what are the limitations?
A First Service Organization (FSO) and at least one A-Org.
An FSO must be a service organization. An FSO can be any type of entity (corporation partnership etc.). However for an A-Org group if the FSO is a corporation then it must be a professional service corporation.
Must an A-Org be a service organization?
Yes
Describe a professional service corporation.
Corporations organized for the principal purpose of providing professional services. Generally professions where the state requires a license to provide services such as a doctor chiropractor lawyer accountant architect or engineer require the formation of a professional corporation.
How much ownership interest must the A-Org or HCEs of the A-org must have in the FSO?
There is no minimum amount of ownership required. The A-Org must regularly perform service for the FSO or be regularly associated with the FSO in performing service for third persons.
What makes up B-Org groups and how does it differ from an A-Org?
An FSO and at least one B-Org.
The FSO must be a service organization; however if the FSO is a corporation it does not have to be a professional service corporation.
Must a B-Org be a service organization?
No. But the B-Org must derive a ‘significant portion of business’ from the performance of service for FSO or for A-Org related to the FSO.
What are the two “significant portion of business” safe harbors for purposes of determining a B-org ASG?
Service receipt safe harbor and total receipt safe harbor. Service receipt safe harbor provides a safe harbor not being significant. Total receipt safe harbor provides safe harbor for being significant.
What is ‘service receipts percentage’?
The service receipts percentage is the ratio of the gross receipts derived from services the B-Organization performs for the FSO and/or the A-Organization(s) to the total gross receipts derived from all services performed.
What must the “service receipts percentage” be for a B-Org?
The B-Organization’s services are not considered significant if its ‘service receipts percentage’ is less than 5%.
What is ‘total receipts percentage’ for purposes of determining a B-org?
The total receipts percentage is the ratio of the gross receipts derived from services the B-Organization performs for the FSO and/or the A-Organization(s) to the total gross receipts (whether or not service related).
What must the “total receipts percentage” be for a B-Org?
The B-Organization’s services are considered significant if its ‘total receipts percentage’ is 10% or more.
What happens in a group consisting of multiple A-Orgs and B-Orgs?
All A-Orgs and B-Orgs identified with the same FSO constitute one ASG.
What happens if there are several FSOs with common B-Orgs?
Those do not constitute one ASG - each FSO gives rise to a separate ASG.
What does a management group ASG consists of?
A recipient organization (and related organizations) and a management organization. The management organization’s principal business must be the performance of management functions on a ‘regular and continuing’ basis for the recipient organization.
Which IRS regulations provide guidance on the exact definition of management functions and the level of activity that constitutes the “principal” business?
There is no IRS regulation providing guidance; however in normal usage ‘principal’ is often considered to be a majority or more than 50%. No common ownership is required between the management organization and the recipient.
What family attribution are covered under IRC 318?
- Between spouses (unless legally divorced legally separated or meet the exceptions in the IRC 1563 attribution section);
- From parent to child and child to parent (age of child irrelevant);
- Legally adopted children deemed blood relatives;
- From grandchild to grandparent;
- No attribution from grandparent to grandchild;
- No sibling attribution; and
- No double attribution.
For the ASG rules how is ownership attributed from an organization?
Stock owned by a partnership, S corporation, estate or trust is deemed to be owned proportionately by partners shareholders beneficiaries etc. Stock owned by C corporations is deemed to be owned by its 50% or more shareholders.
For the ASG rules how is ownership attributed to an organization?
Stock owned by a partner, a shareholder in an S corporation or a beneficiary of an estate or trust is deemed to be owned by the entity involved in proportion to ownership interest. Stock owned by a 50% or more shareholder of a C corporation is deemed to be owned by that corporation.
What are some key features of a common law employees?
Compensation for a common law employee is reported on a Form W-2. Wages shown on Form W-2 are subject to FICA withholding for the employee portion and the company is responsible for payroll tax as well. Federal income tax withholding is also required on wages paid on Form W-2.
Who is considered to be a self-employed individual?
Owners of sole proprietorships and partners in partnerships. In addition individuals who are owners of LLCs or LLPs that elect to be taxed as partnerships are considered to be self-employed individuals.
What are some key features of self-employed individuals?
Do not receive Forms W-2. Their income is shown on Schedule C to their Form 1040 (if they are sole proprietors) or on a Schedule K-1 (if they are partners). This income is considered to be their ‘net earnings from self-employment.’
What is “earned income”?
The adjusted earnings from self-employment that allow them to reflect compensation to be used for retirement plan purposes
How does the FICA tax a self-employed individual pays vary from that of regular employees?
Self-employed individuals pay twice the FICA tax of regular employees because they pay both the employer and the employee portions. These amounts are not deducted from the income on the Schedule C or the K-1 but are a deduction on the Form 1040. Therefore, the net earnings from self-employment must be adjusted by subtracting the ‘employer half’ of the FICA tax that is 50% of the deduction shown on the Form 1040.
Where is the tax deduction for the contribution (both salary deferrals and employer contributions) made on behalf of the self-employed individual reflected?
On the 1040. Not on the Schedule C or Schedule K-1. Earned income should include salary deferrals. However, earned income does not include the company contributions on behalf of the self-employed individual. The amount of those contributions (the nonelective contributions or matching contributions) must be subtracted from the net earnings from self-employment to obtain the earned income.
Who is considered to be an independent contractor?
Any person who performs services for a company in a non-employee capacity
What are some key features of an independent contractor?
Compensation for an independent contractor is reported on a Form 1099-MISC. There is no FICA withholding on compensation paid to an independent contractor and there is generally not any federal income tax withholding from that compensation either. That income is generally reported as self-employment income on the 1040 Schedule C of the independent contractor.
What is the main factor in determining if someone is an employee or an independent contractor?
Whether a company for which services are provided has the right to ‘control and direct’ the individual who performs the services.
What test does the IRS use to determine if an individual is a “common law” employee?
The IRS issued a 20 factor test (Revenue Ruling 87-41)
What is the penalty for improper classification of an independent contractor?
Violation of the exclusive benefit rule per IRC 401(a)(2). The exclusive benefit rule requires that a qualified plan be maintained for the exclusive benefit of the employer’s employees and their beneficiaries. If a non-employee is allowed to participate in the plan the exclusive benefit rule is violated.
What is a leased employee?
An individual who is not a common law employee of an organization
(recipient) but is treated as an employee of the recipient for qualified plan purposes. The recipient is the organization for whom the employee provides services. The leasing organization provides the leased employee’s services to the recipient.
What are the four conditions to qualify as a leased employee?
- The recipient pays a fee for the service of the individual. The agreement can be formal or informal.
- The individual provides services on a ‘substantially full time basis’ for at least one year (1500 hours in 12 month period or 75% of customary hours for that position). When determining if an individual has been substantially full time for at least a year any service as a common law employee for the recipient or a related person or entity must be included.
- The recipient must have primary direction or control over individual services.
- The leasing organization (not recipient) is the common law employer of the individual.
What is a professional employer organization?
Commonly known as an employee leasing organization. If the recipient is actually the common law employer then the individual is not a leased employee but is a common law employee of the recipient for qualified plan purposes.
Why is the employment relationship between the workers and the employer sponsoring the plan a major factor in determining whether the plan is a qualified plan?
If a qualified plan provides benefits for individuals who are not employees of the employer sponsoring the plan the plan does not satisfy the exclusive benefit rule and could be disqualified. The confusion caused by determining who is the employer when leased employees are involved is the driving force behind PEOs sponsoring multiple employer plans along with their clients. Therefore it is recommended that legal counsel be sought on who is the common law employer.
When can the recipient exclude leased employees from its plan?
If IRC 410(b) and IRC 401(a)(26) are satisfied without them.
Describe the offset the recipient organization that includes leased employees in its own plan can make.
It can offset contributions required by the amount of contributions allocated to the individual in the leasing organization’s plan. The offset must be stated in the recipient’s plan document. Regardless of language in the recipient’s document benefits in both the recipient’s plan and the leasing company plan must be aggregated for the annual additions limit of IRC 415. Total annual additions from both plans may not exceed the IRC 415 limit.
When and when not can the recipient can take a deduction for contributions?
The recipient can take a deduction for contributions made to leased employees in the recipient plan but cannot take a deduction for contribution made for the leased employee by the leasing organization.
What happens if the leased employee participates in both a leasing plan and a recipient plan?
The leasing organization does not get credit for the contribution made by the recipient employer. Also prior service with a recipient organization is not credited to the leasing organization plan for eligibility or vesting purposes.
What are the consequences of a change in status from Common Law Employee of the Recipient to a Leased Employee?
- May still get accrual from recipient plan;
- Vesting continues in the recipient plan;
- Must aggregate IRC 415 limits of leased employee plan with those of recipient plan; and
- No distributable event when an individual changes from a common law employee to a leased employee as this is not considered by the IRS to be a severance from employment.
What limited exceptions are provided by a leasing organization safe harbor plan to leased employee rules?
- Individuals are not treated as leased employees if the leasing organization maintains a safe harbor plan.
- If the safe harbor plan exists individuals cannot be covered in a recipient plan.
- Can only apply if less than 20% of recipient’s nonhighly compensated workforce is leased.
What provisions much a safe harbor MEP money purchase plan contain?
o Minimum 10% non-integrated contribution to a money purchase plan based on IRC 415 compensation;
o 100% immediate vesting;
o Immediate participation (immediate participation does not apply if the employees perform substantially all of their services for the leasing organization).
What is a multiple employer plan?
A plan sponsored by two or more employers where at least two of the sponsoring employers are not members of the same related group (not controlled groups or affiliated service groups). Care should be taken when establishing multiple employer plans because DOL opinions often scrutinize whether the employers constitute a bona fide group of employers. In some cases this would cause the DOL to regard the multiple employer plan as many individual plans rather than a single plan.
List 4 benefits for adopting a multiple employer plan?
1) A business relationship or common ownership may exist among participating employers even though they are not part of a controlled group.
2) Employers from an organization or common industry may have employees who shift from one participating employer to another. Multiple employer plans can ease the resulting administrative burden.
3) A leasing organization may have a plan held by a leasing organization and recipient employers who use leased employees. Leasing organization plans can coordinate coverage and contributions.
4) A multiple employer plan may be established if a PEO needs to avoid an exclusive benefit rule violation.
Can a multiple employer plan may be used when a business relationship or common ownership exists among participating employers even though they are not part of a controlled group?
Yes
How is establishing a multiple employer plan rather several single employer plans helpful?
In a small plan situation, a multiple employer plan may occur when two or more businesses have common owners but not at a level to qualify as a controlled group. It may help control costs by reducing administrative expenses or by providing a larger pool of money to invest.
What is Professional Employer Organizations (PEO)?
It is not defined by IRS but is generally deemed to be an organization that contracts with one or more companies to provide employees through staffing or leasing arrangements. The term PEO often implies that the common law employer status of the leasing company is questionable.
When does a PEO plan violate the exclusive benefit rule under IRC ?401(a)(2)?
If leased employees are covered solely by a PEO plan and the PEO is not the common law employer. A multiple employer plan avoids this issue because the exclusive benefit rule is applied to the plan as a whole rather than on an employer by employer basis.
