Chapter 1 Flashcards

1
Q

What are the three basic types of controlled groups?

A

Parent-subsidiary group; Brother-sister group; and Combined groups.

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2
Q

To what does IRC Sec 414(b) refer?

A

Governs corporations under common control.

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3
Q

To what does IRC Sec 414(c) refer?

A

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.)

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4
Q

When does a parent-subsidiary group exists?

A

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.

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5
Q

Is it possible for a company to have multiple subsidiaries or multiple tiered subsidiaries that constitute a single controlled group?

A

Yes

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6
Q

May a parent-subsidiary group exist when the parent is a foreign company?

A

When a foreign parent owns 80% or more of two or more US subsidiaries.

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7
Q

When would a foreign company have a limited impact on any testing?

A

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.

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8
Q

How many common owners must satisfy the ownership tests in a brother-sister controlled group?

A

5 or fewer

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9
Q

How much controlling interest/common control must be satisfied in a brother-sister controlled group?

A

80%

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10
Q

How much effective control must be satisfied in a brother-sister controlled group?

A

50%

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11
Q

Who qualifies as a common owner in a brother-sister relationship?

A

Individual trust or estate.

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12
Q

When is an owner ignored for testing purposes in a brother sister relationship?

A

When an owner does not own directly (or indirectly) some stock in each business as per U.S. v Vogel Fertilizer (1982)

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13
Q

When can combination parent-subsidiary and brother-sister groups exist?

A

When the parent in the parent-subsidiary group is the common member in the brother-sister group.

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14
Q

When is a combination not considered a combined controlled group?

A

If the subsidiary in a parent-subsidiary group is a common member of a brother-sister group.

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15
Q

Is it true that a foreign parent or subsidiary does not need to be included in a combined group?

A

No a foreign parent or subsidiary must also be considered.

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16
Q

What is attribution and when does it occur?

A

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.

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17
Q

For purposes of determining whether a controlled group exists which attribution rules should be used?

A

IRC 1563

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18
Q

What does spousal attribution specify for purposes of determining a controlled group?

A

An individual is deemed to own stock owned by spouse unless legally divorced or separated by decree.

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19
Q

For the controlled group rules what conditions if met create an exception to spousal attribution?

A

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.
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20
Q

What nullifies the exception to spousal attribution for the controlled group rules.

A

Community property interest nullifies this exception because community property ownership = direct ownership

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21
Q

Describe the 3 types of family attribution other than spousal attribution for the controlled group rules.

A

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.

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22
Q

Which attribution applies between siblings for controlled group purposes?

A

None

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23
Q

What criteria rules attribution from a corporation to an individual for cg rules?

A

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.

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24
Q

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?

A

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.

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25
Q

What criteria rules attribution from a partnership to an individual for cg rules?

A

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.

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26
Q

How is that pro rata portion determined for each partner when attributing ownership for cg rules?

A

By multiplying the greater of his capital or profits interest by the interest the partnership has in the other organization.

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27
Q

What criteria rules attribution from estates and stocks to an individual for cg purposes?

A

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.

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28
Q

What criteria rules attribution from options to an individual for cg purposes?

A

If someone owns an option to buy company stock then he is treated as owning that stock.

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29
Q

What stock is not included under IRC 1563 for determining parent-subsidiary Controlled Groups?

A
  • 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.
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30
Q

For what purposes are members of a controlled group treated as a single employer?

A
  • 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.
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31
Q

When must compensation from all entities must be aggregated?

A

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).

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32
Q

When under IRC 415(h) for purposes of IRC 415 limitations does a parent-subsidiary group exists?

A

If the parent company owns more than 50% of the subsidiary company (rather than at least 80%).

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33
Q

To which cg type does IRC Se 415(h) not apply?

A

Brother-sister groups

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34
Q

What happens if the controlled group members participate in the same plan?

A

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.

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35
Q

What is an affiliated service group (ASG) and where are they commonly observed?

A

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.

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36
Q

Under ASG rules are banks and other financial institutions considered to be service organizations?

A

No

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37
Q

What are the three categories of ASG?

A

1) A-Org group
2) B-Org group
3) management group

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38
Q

All ASGs must included what?

A

A first service organization (FSO) and one or more A-Organizations (A-Orgs) and/or B-Organizations (B-Orgs).

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39
Q

Which ASG is the exception?

A

Management groups

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40
Q

What makes up A-Org groups and what are the limitations?

A

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.

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41
Q

Must an A-Org be a service organization?

A

Yes

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42
Q

Describe a professional service corporation.

A

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.

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43
Q

How much ownership interest must the A-Org or HCEs of the A-org must have in the FSO?

A

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.

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44
Q

What makes up B-Org groups and how does it differ from an A-Org?

A

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.

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45
Q

Must a B-Org be a service organization?

A

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.

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46
Q

What are the two “significant portion of business” safe harbors for purposes of determining a B-org ASG?

A

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.

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47
Q

What is ‘service receipts percentage’?

A

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.

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48
Q

What must the “service receipts percentage” be for a B-Org?

A

The B-Organization’s services are not considered significant if its ‘service receipts percentage’ is less than 5%.

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49
Q

What is ‘total receipts percentage’ for purposes of determining a B-org?

A

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).

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50
Q

What must the “total receipts percentage” be for a B-Org?

A

The B-Organization’s services are considered significant if its ‘total receipts percentage’ is 10% or more.

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51
Q

What happens in a group consisting of multiple A-Orgs and B-Orgs?

A

All A-Orgs and B-Orgs identified with the same FSO constitute one ASG.

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52
Q

What happens if there are several FSOs with common B-Orgs?

A

Those do not constitute one ASG - each FSO gives rise to a separate ASG.

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53
Q

What does a management group ASG consists of?

A

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.

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54
Q

Which IRS regulations provide guidance on the exact definition of management functions and the level of activity that constitutes the “principal” business?

A

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.

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55
Q

What family attribution are covered under IRC 318?

A
  • 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.
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56
Q

For the ASG rules how is ownership attributed from an organization?

A

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.

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57
Q

For the ASG rules how is ownership attributed to an organization?

A

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.

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58
Q

What are some key features of a common law employees?

A

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.

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59
Q

Who is considered to be a self-employed individual?

A

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.

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60
Q

What are some key features of self-employed individuals?

A

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.’

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61
Q

What is “earned income”?

A

The adjusted earnings from self-employment that allow them to reflect compensation to be used for retirement plan purposes

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62
Q

How does the FICA tax a self-employed individual pays vary from that of regular employees?

A

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.

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63
Q

Where is the tax deduction for the contribution (both salary deferrals and employer contributions) made on behalf of the self-employed individual reflected?

A

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.

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64
Q

Who is considered to be an independent contractor?

A

Any person who performs services for a company in a non-employee capacity

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65
Q

What are some key features of an independent contractor?

A

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.

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66
Q

What is the main factor in determining if someone is an employee or an independent contractor?

A

Whether a company for which services are provided has the right to ‘control and direct’ the individual who performs the services.

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67
Q

What test does the IRS use to determine if an individual is a “common law” employee?

A

The IRS issued a 20 factor test (Revenue Ruling 87-41)

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68
Q

What is the penalty for improper classification of an independent contractor?

A

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.

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69
Q

What is a leased employee?

A

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.

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70
Q

What are the four conditions to qualify as a leased employee?

A
  • 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.
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71
Q

What is a professional employer organization?

A

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.

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72
Q

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?

A

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.

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73
Q

When can the recipient exclude leased employees from its plan?

A

If IRC 410(b) and IRC 401(a)(26) are satisfied without them.

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74
Q

Describe the offset the recipient organization that includes leased employees in its own plan can make.

A

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.

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75
Q

When and when not can the recipient can take a deduction for contributions?

A

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.

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76
Q

What happens if the leased employee participates in both a leasing plan and a recipient plan?

A

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.

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77
Q

What are the consequences of a change in status from Common Law Employee of the Recipient to a Leased Employee?

A
  • 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.
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78
Q

What limited exceptions are provided by a leasing organization safe harbor plan to leased employee rules?

A
  • 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.
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79
Q

What provisions much a safe harbor MEP money purchase plan contain?

A

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).

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80
Q

What is a multiple employer plan?

A

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.

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81
Q

List 4 benefits for adopting a multiple employer plan?

A

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.

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82
Q

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?

A

Yes

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83
Q

How is establishing a multiple employer plan rather several single employer plans helpful?

A

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.

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84
Q

What is Professional Employer Organizations (PEO)?

A

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.

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85
Q

When does a PEO plan violate the exclusive benefit rule under IRC ?401(a)(2)?

A

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.

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86
Q

When does Rev. Proc. 2002-21 provide relief from the exclusive benefit violation for PEOs that sponsored plans as a single employer?

A

Provided that they converted the plan to a multiple employer plan or terminated the plan no later than the end of the plan year that begins on or after January 1, 2003.

87
Q

All employers who participate in a multiple employer plan must be treated as a single employer when applying which plan requirements?

A
  • Eligibility rules under IRC 410(a);
  • Exclusive benefit under IRC 401(a);
  • Vesting under IRC 411;
  • Accrual (may provide reciprocal service recognition);
  • Contribution and benefit limits under IRC 415;
  • Excise tax on under-funding under IRC 4971; and
  • Assets reported and held under one trust but must have a hypothetical asset allocation among participating employers.
88
Q

For which plan requirements must each employer who participates in a multiple employer plan be treated as a separate plan (i.e. each employer or controlled group of employers is evaluated separately)?

A
  • Coverage rules under IRC 410(b);
  • Nondiscrimination rules under IRC 401(a)(4);
  • Top-heavy rules under IRC 416;
  • Funding for pension plans under IRC 412; and
  • Deduction limits under IRC 404(a).
89
Q

What is the primary disadvantage to a multiple employer plan?

A

A failure of one portion of the plan can result in the disqualification of the plan as a whole. When establishing a multiple employer plan careful consideration should be given to the ability of each participating employer to provide the information necessary to ensure that all qualification issues are met in a timely fashion so as not to jeopardize the whole plan.

90
Q

What does the provisions of IRC ?414(r) allow?

A

An employer that is not part of an affiliated service group to divide its business into qualified separate lines of business and then apply the minimum coverage minimum participation and nondiscrimination tests separately to the employees of each of the separate lines of business.

91
Q

What is a line of business (LOB)

A

A portion of the employer that is identified by the property or services it provides to customers of the employer. A LOB does not have to be a separate legal entity. A LOB may be a separate division within one company.

92
Q

What four conditions must be met for a LOB to be qualified as a separate line of business (SLOB)?

A

1) LOB is a separate organizational unit;
2) LOB is a separate financial unit;
3) LOB has a separate employee workforce; and
4) LOB has separate management.

93
Q

What three conditions must be met to demonstrate that an employer maintains a qualified separate line of business (QSLOB)?

A

1) The SLOB must have at least 50 employees on each day of the testing year;
2) Employer must notify the IRS that it is operating QSLOBs. (Notification through Form 5310-A.)
3) The SLOB must satisfy the administrative scrutiny test

94
Q

What employees are included and excluded from the testing year?

A

o Include employees covered under collective bargaining agreements.
o Exclude employees who:
* Normally work less than 17 1/2 hours per week;
* Work 6 months or less during a year;
* Are under age 21; or
* Have not completed 6 months of service.

95
Q

How can the SLOB satisfy the administrative scrutiny test?

A

o Satisfying one of six safe harbors:
* Statutory safe harbor;
* Industry category safe harbor;
* Merger and acquisition safe harbor;
* FAS 14 (industry segments) safe harbor;
* Average benefits safe harbor; or
* Minimum/maximum benefits safe harbor;
o Or the employer must receive an individual ruling from the IRS that the SLOB satisfies the administrative scrutiny test.

96
Q

Describe the QSLOB employee allocation process.

A

All employees must be allocated to an appropriate QSLOB. Substantial service employees who perform at least 75% of services for LOB must be allocated to that LOB. Employer may choose to treat any employee who performs at least 50% of his or her services for a LOB as a substantial service employee for that LOB.

97
Q

What are the four methods allowable under QSLOB rules to assign a residual employee employees who are not substantial service employees to a LOB?

A

1) Dominant line method.
2) Pro rata method.
3) HCE percentage ratio method.
4) Small group method.

98
Q

What percentage must the dominant line QSLOB contain of all substantial service employees?

A

Dominant line method allocates all residual employees to one QSLOB designated as the dominant line of business. Generally the dominant line QSLOB must contain at least 50% of all substantial service employees although under certain circumstances this percentage might be lowered to 25%.

99
Q

For purposes of allocating residual employees when determining QSLOBs how does the pro rata method allocate residual employees among QSLOBs?

A

Pro rata method allocates residual employees among QSLOBs based on each QSLOB’s share of the total substantial service employee population.

100
Q

For purposes of allocating residual employees when determining QSLOBs describe the HCE percentage ratio method.

A

HCE percentage ratio method divides the residual employees pro rata based on the number of HCEs assigned to each QSLOB.

101
Q

What are the limitations of the small group method for allocating residual employees for QSLOBs?

A

Small group method only is available if total number of residual employees represents 3% or less of the total number of employees. If small group definition is met employer may allocate the small group to any QSLOB provided that after the allocation:
o The allocation of residual employees is reasonable;
o Any QSLOB receiving residual employees satisfies statutory safe harbor administrative scrutiny test; and
o Any QSLOB receiving residual employees has been assigned at least 10% of the residual employees.
o Employees not in QSLOB are excludable employees for that QSLOB.

102
Q

When is QSLOB gateway test passed?

A

If each QSLOB satisfies both the nondiscriminatory classification test on an employer wide basis with respect to all nonexcludable employees of the controlled group and also satisfies the nondiscriminatory classification test separately with respect solely to the employees of the QSLOB.

103
Q

How does a change in ownership effect a controlled group or affiliated service group?

A

It can result in the creation (or elimination) of a controlled group or affiliated service group. A parent-subsidiary arrangement may be created when one organization purchases the stock of another company. A brother-sister arrangement can arise when owners of an organization purchase stock of another entity. Affiliated service groups can form when several owners from a previously unrelated practice form a partnership.

104
Q

What is a plan merger?

A

A merger is a consolidation of two or more plans into a single plan.

105
Q

What is a plan spin-off?

A

A spin-off involves the splitting of a plan into two or more plans.

106
Q

What is a transfer?

A

A transfer is a direct transfer of assets and liabilities attributable to one or more participants in one plan to another.

107
Q

What must each participant receive after the merger spin-off or transfer?

A

Each participant must receive benefits on a termination basis from the plan immediately after the merger spin-off or transfer equal to or greater than the benefits the participant would receive on a termination basis immediately before the merger spin-off or transfer. ‘Termination basis’ means the benefits that would be provided exclusively by the plan assets pursuant to ERISA 4044 if the plan terminated. It does not include benefits that are guaranteed by the PBGC but not provided for by plan assets.

108
Q

When doesn’t IRC 414(l) not apply?

A

To multiemployer plans governmental plans under IRC 414(d) or non-electing church plans under IRC 414(e). It only applies if more than a single plan is involved and the plan assumes the liabilities or obtains the assets from another plan (merger or spin-off).

109
Q

What are the three general types of business transactions when purchases/sales are done?

A

1) stock transactions
2) asset transactions
3) company mergers.

110
Q

How effect does a stock transaction have on the plans’ operation?

A

If the company sponsored a retirement plan prior to the transaction the company still sponsors that plan after the transaction.An individual or a company may acquire control of another corporation by buying a significant amount (usually a majority) of the target’s stock. In that situation the target’s structure does not change in any fashion by virtue of the transaction-all of the
company’s operations, its officers and directors, its contracts with other individuals and companies, its employees all stay the same.

111
Q

In a stock purchase who takes on all of the rights and liabilities of the target corporation?

A

The buyer. This includes the target company’s contracts and receivables as well as the target’s debts and legal liabilities.

112
Q

In a stock sale how are the any plans that are sponsored by the target company effected?

A

The plans continue to be so sponsored after the acquisition. If the target company is now part of a controlled or affiliated service group, those plans must be administered accordingly - the plan must meet coverage and nondiscrimination requirements based on the controlled or affiliated service group. There is a grace period during which no coverage testing is required but beware other nondiscrimination testing is still required although there is no regulatory guidance on how to perform these tests.

113
Q

What effect does asset transactions have on the plans’ operation?

A

The individuals who owned the stock of the target company continue to own that stock-the only change is that some or all of the ‘stuff’ owned by the company is sold to someone else and the selling company received cash or something else in exchange.

114
Q

How does a stock purchase differ from an asset purchase?

A

Except for the assets that are sold and liabilities that are assumed the selling company retains all of its rights interests and liabilities. Plans that are sponsored by the company that sells its assets continue to be maintained by that company unless the buyer takes affirmative action to adopt the plans as a successor sponsor. Employees that terminate employment with the seller and go to work for the buyer are treated exactly like other terminees - that is they are usually eligible for a distribution from the seller’s plan.

115
Q

What is the effect on employees of the target company that become employees of the buyer?

A

They are new hires. There is no obligation to credit service with the target company in the plan sponsored by the buyer. In fact if the buyer wants to credit that service for eligibility or vesting purposes it likely must amend its plan to do so. Furthermore the individuals that become employees in connection with the transaction will not be highly compensated employees in the buyer’s plan as they will have had no compensation in the prior plan year. Of course if any such individuals are granted or are able to purchase more than 5% of the stock in the buyer’s company they will be highly compensated employees due to their stock ownership.

116
Q

What effect does a company merger have on the plans’ operation?

A

Any plans sponsored by any of the merging companies are automatically sponsored by the survivor after the merger is over. No legal documentation is needed to make this sponsorship happen - it is an automatic result of the legal transaction. This is true even if the plan is not amended to reflect the new sponsorship.

It is important that the plans be reviewed before the transaction to make sure that participation is limited to the proper groups once the merger occurs.

117
Q

What is a company merger?

A

Generally, a merger causes one company to be absorbed into another (and the stock of that company is exchanged for stock in the absorbing company) or the two companies are combined into a new company (and the stock of the two original companies is exchanged for stock in the new company). The resulting company (usually called the ‘survivor’ even if it is a brand new company) will own all of the assets of the merged companies. Similarly it will also be responsible for all of the liabilities of the merged companies.

118
Q

What effect does the sale of a subsidiary have on the plans’ operation?

A

If the stock of a subsidiary of one parent is sold to a new parent the employees will continue to work for the same company (i.e. the subsidiary). However the controlled group to which that company belongs will have changed. This produces some special problems if the subsidiary was a participating sponsor in the former parent’s 401(k) plan.

There is no distributable event in the parent’s 401(k) plan with regard to these employees even if the subsidiary will cease to be a participating employer in the former parent’s 401(k) plan after the transaction.

119
Q

What is the exception to distribution limitations under 401(k) that applies after the sale of a subsidiary?

A

The former parent’s 401(k) plan may pay out the employees of the sold subsidiary if:

  • The buyer is not related to the former parent;
  • There is no transfer of plan benefits from the former parent’s 401(k) plan to the new parent’s plan (although rollovers even direct rollovers by the participants are permitted); and
  • At no time after the sale transaction does the subsidiary participate as an employer in the former parent’s plan.
120
Q

What happens if the participation by the subsidiary in its former parent?s plan does not cease before the transaction occurs?

A

The ability to distribute benefits from the former parent’s plan to the subsidiary’s employees evaporates and the employees may be paid only when they terminate employment from the former subsidiary.

121
Q

When are transition rules effective?

A

Immediately when entities shift into or out of controlled or affiliated service group status due to company acquisitions, dispositions, mergers or other significant changes in ownership.

122
Q

Describe m/a transition rule for 410(b) and 401(a)(26)?

A

The provisions of IRC 410(b) and 401(a)(26) do not apply after the transaction until after the end of the plan year beginning after the change provided the participation and coverage tests are met in each plan prior to the change and the affected plan is not significantly altered during the transition period. However, the eligibility provisions of the plans (including provisions relating to which company within the controlled group employs eligible individuals) must be applied as written on the date of the transaction. Amendments of these rules after the transaction will terminate the transition period.

123
Q

How long is the m/a 410(b) transition period?

A

Begins on the date of the change in members of a controlled or affiliated service group (or the sale of substantially all of the assets of the company) and ends on the last day of the first plan year beginning after the date of the change.

124
Q

What is the m/a transition rule for determining QSLOBs?

A

The tests for determining Separate Lines of Business are granted same relief timing as those for participation and coverage.

125
Q

In a M&A situation, when are plans that were not aggregated as of the first day of a plan year get an exception to the IRC Sec 415 limit?

A

Two requirements for the 415 exception

  1. They become required to aggregate during the year and the aggregation results in a total allocation to a participant in excess of the IRC Sec 415 limitations.
  2. There is no further increase in accrued benefits resulting from employer contributions after the change.
126
Q

What does 414(l) require in a Merger of Defined Contribution Plans?

A

Immediately after the merger, each participant in the plan has an account balance equal to the sum of the account balances the participant had in the plans immediately prior to the merger.

127
Q

What does 414(l) require in a Merger of Defined Benefit Plans?

A

Compare benefits on a termination basis both before and after the merger. If the sum of all assets of all plans is not less than the sum of the present value of accrued benefits (whether or not vested) then IRC Sec 414(l) satisfied by combining assets and preserving accrued benefits. If the sum of the assets of all plans is less than the sum of the present value of accrued benefits (whether or not vested) then the accrued benefits in the plan as merged cannot be provided on a termination basis. The merged plan must maintain a special schedule of benefits in accordance with a modified application of ERISA Sec 4044.

128
Q

How is a smaller plan whose liabilities are less than 3% of the assets of another larger plan handled when it merges with the larger plan?

A

IRC Sec 414(l) will be satisfied if a special schedule of benefits for the participants of the smaller plan are payable in a higher priority than the highest priority per ERISA Sec 4044

129
Q

What does 414(l) require in a Spin-off of a Defined Contribution Plan?

A
  1. The sum of the account balances for each of the participants in the resulting plan is equal to the account balance of the participant in the plan before the spin-off. 2. The assets in each of the plans immediately after the spin-off equal the sum of the account balances for all participants in that plan.
130
Q

What does 414(l) require in a Spin-off of a Defined Benefit Plan that was fully funded?

A
  1. All the accrued benefits of each participant are allocated only to one of the plans that have been spun off.
  2. The value of the assets allocated to each of the spin-off plans is not less than the sum of the present value of the benefits on a termination basis in the plan before the spin-off for all participants in that spin-off plan.
131
Q

Which Spin-off Plans are not Taken into Account for Sec 414(l)?

A
  • Plans transferred outside of a related group;
  • Plans transferred outside of a multiple employer plan; and
  • Terminated plans.
132
Q

What are the protected benefits under IRC Sec 411(d)(6) ?

A
  • Accrued benefits;
  • Early retirement benefits and retirement subsidies;
  • Certain optional forms of benefit
133
Q

Which optional forms of benefit are included under the protected benefits of IRC Sec 411(d)(6)?

A

o Payment schedule;
o Timing;
o Commencement;
o Medium of distribution;
o The portion of the benefit to which such distribution features apply; and
o Election rights regarding the optional forms.

134
Q

If profit sharing plans are merged together, what optional forms of payments may be eliminated?

A

Optional benefit forms may be eliminated so long as a lump-sum distribution is permitted at the time that the other form was to begin payments.

135
Q

What benefits are not protected under IRC Sec 411(d)(6) ?

A
  • Loans;
  • Right to make after-tax employee contributions or elective deferrals;
  • Right to direct investments;
  • Right to a particular form of investment.
  • Certain optional forms of distribution
136
Q

Which optional forms of benefit are included under non-protected benefits of IRC Sec 411(d)(6)?

A

o In a DC plan not subject to J&S only the lump sum is protected. All other distribution forms can be eliminated.
o In a DB plan the normal form is protected. Optional forms may be eliminated if they can be defined as redundant or non-core. If the plan has multiple uniform Joint & Survivor benefits these options can be eliminated as long as the highest and lowest options are preserved.

137
Q

For purposes of determining whether there was a partial plan termination has occurred where does the IRS focus when determining if a reduction is significant?

A

On the percentage of participants not the number of participants. The IRS provides that a turnover rate of at least 20% of the participants creates a rebuttable presumption that a partial termination has occurred. See Rev. Rul. 2007-43.

138
Q

For purposes of determining whether there was a partial plan termination has occurred how is the turnover rate calculated?

A

(1) dividing the number of participating employees who had an employer-initiated severance from employment during the applicable period by (2) the sum of all of the participating employees as of the start of the applicable period and the employees who became participants during the applicable period (generally the plan year). The applicable period depends on the circumstances: the applicable period is a plan year (or in the case of a plan year that is less than 12 months the plan year plus the immediately preceding plan year) or a longer period if there are a series of related severances from employment.

139
Q

For purposes of determining whether there was a partial plan termination has occurred, what is an employer-initiated termination?

A

Any involuntary termination other than death, disability or retirement on or after normal retirement age even if it is caused by reasons outside of the employer’s control (e.g. depressed economic conditions). No exception is provided for terminations due to good cause. Presumably the IRS will recognize a firing for cause as a relevant factor to determine if the employer has rebutted the presumption of a partial termination even though the employer has few or no involuntary terminations during its operating history.

140
Q

For purposes of determining whether there was a partial plan termination has occurred how does an employer support a claim that a termination was voluntary?

A

The IRS provides in Rev. Rul. 2007-43: through items such as information from personnel files employee statements and other corporate records. This confirms that voluntary terminations are disregarded but only if the employer can support a determination that the termination is in fact voluntary. This approach also is consist with IRS’ audit guidelines published in Announcement 94-101 where the IRS noted that it presumes all terminations are involuntary unless the employer shows otherwise.

141
Q

What relevant factors favor a finding that there is no partial termination for the applicable period?

A

(1) information as to the turnover rate in other periods and the extent to which terminated employees were replaced and (2) whether the new employees perform the same job functions had the same job classification or title and received comparable compensation.

142
Q

What is the purpose of a band around 20% for determining whether or not there has been a partial plan termination?

A

Determining the range in which a contrary result can be determined on the basis of the facts and circumstances. That band is from 10% to 40% reduction. From 10% to 20% the presumption is that there is no partial termination. From 20% to 40% the presumption is that there is a partial termination. Below 10% the reduction in coverage should be conclusively presumed not to be a partial termination. Above 40% the reduction in coverage should be conclusively presumed to be a partial termination.

143
Q

What qualifies as a full plan termination?

A

When it is amended to terminate and it is the intention of the plan sponsor and administrator that all assets will be distributed to participants as soon as administratively feasible. If the distribution is not to occur for an extended period of time the plan is merely frozen and not terminated. Distributions that occur within twelve months of the termination are considered to be as soon as administratively feasible although PBGC covered DB plans may be subject to different timing requirements.

144
Q

What role does full vesting play in termination?

A

Generally, all participants must be fully vested upon plan termination. These rules apply to anyone who has funds in the plan although individuals who have incurred five one-year breaks in service (so that the forfeiture of their nonforfeitable interest is irrevocable under IRC Sec 411 rules) do not need to be provided with full vesting. Participants who have taken distribution prior to the termination (and whose nonvested accounts have been forfeited as a result of the distribution despite the fact that they have no breaks-in-service) generally do not need to be provided with full vesting. If the plan allows for deemed distributions of 0% vested participants upon termination of employment these 0% vested terminated participants also do not need to be provided with full vesting.

145
Q

What is the importance of a plan sponsor electing to obtain a favorable determination letter on the termination of the plan?

A

It will confirm that all plan documentation is up to date (which is required of terminated plans) or will provide a remedial amendment period in which the documentation can be updated. The IRS will also review certain operational aspects of the termination such as which employees are entitled to full vesting. The submission of the plan for a favorable determination is made on Form 5310 and these submissions are given priority review even if they are ‘off-cycle’ under the 5- or 6-year submission periods.

146
Q

Describe the special termination review process PBGC-covered defined benefit plans must undergo.

A

A special notice must be provided to plan participants and a filing with the PBGC is required. Furthermore if a defined benefit plan’s assets are not sufficient to cover all accrued benefits it is possible under the PBGC rules that the plan may not terminate until the assets become sufficient. An exception to this limitation applies if the company is in bankruptcy or reorganization procedures or if the PBGC initiates the termination due to concern that its liability will increase if the plan is permitted to continue. PBGC also recognizes a waiver by a substantial owner of benefits to allow employees to be paid out in full first and the owner to receive the remaining amounts in the plan.

147
Q

Which plans are not able to pay lump-sum distributions or purchase annuities?

A

Any defined benefit plan that does not have an Adjusted Funding Target Attainment Percentage (AFTAP) certification of at least 80%. These plans are not legally able to terminate even if the substantial owner waives their benefits. IRS currently suggests applying for a favorable determination letter on these plans to determine how the plan termination should proceed.

148
Q

When can unallocated assets in a defined contribution be returned to the employer?

A

Only when Sec 415 limits prevent such unallocated assets from being allocated to plan participants and the plan terminates. The plan may provide for the reversion of assets to the employer upon termination of the plan of assets held in the plan’s Sec 415 suspense account (Reg. 1.401(a)-2).

149
Q

What options exist when a defined benefit plan holds assets in excess of what is needed to satisfy benefit liabilities?

A

An opportunity for a reversion of plan assets to the plan’s sponsor upon the termination of the plan. All or part of the surplus or excess assets might be used to increase benefits under the plan or part or all of the excess assets may revert to the plan sponsor.

Plan document provisions must specify how excess assets are treated in the event of plan termination and have been in effect for at least five years. If provisions were not in place for five years or plan document does not address excess assets upon plan terminations excess assets must be distributed to participants in nondiscriminatory manner.

150
Q

If plan document allows reversion to plan sponsor to what is the amount of assets reverting subject?

A

income taxes and a nondeductible 50% excise tax on the gross amount of the reversion. (Tax- exempt and governmental plan sponsors are not subject to the excise tax.)

151
Q

In what two situations may the 50% excise tax upon reversion of assets on plan termination be reduced to 20%?

A
  • Plan sponsor is in Chapter 7 bankruptcy liquidation or similar court proceeding on plan termination date; or
  • Plan sponsor establishes or maintains a qualified replacement plan or part of the excess assets is used to provide benefit increases to participants in the terminating defined benefit plan.
152
Q

What three requirements must the qualified replacement plan satisfy to reduce the excise tax?

A
  • The replacement plan must cover as active participants at least 95% of active participants in the terminated plan who remain employed by plan sponsor after plan termination;
  • Before any assets revert to the plan sponsor a direct transfer of assets must be made from the terminated plan to the replacement plan. Transfer amount should equal at least 25% of the maximum amount the plan sponsor could receive as a reversion; and
  • If the qualified replacement plan is a defined contribution plan the amount transferred must be either allocated to participant accounts in the year of the transfer or held in suspense account and allocated to participants over a period not to exceed seven years. Interest earned on the assets in the suspense account is allocated along with the transferred assets. Alternately amounts in the suspense account can be used to pay reasonable administrative expenses.
153
Q

To what does the 20% excise tax on plan termination apply?

A

Only to the amounts reverting to the plan sponsor. More than 25% of the excess assets can be transferred to the qualified replacement plan. No corporate deduction is allowed for the transferred amounts and the transferred amounts will not be subject to corporate tax.

154
Q

What occurs if benefit increases are given to participants in the terminating defined benefit plan in addition to establishing or maintaining a qualified replacement plan?

A

The 25% amount required to be transferred directly to the qualified replacement plan is reduced by the aggregate amount of the benefit increases provided that the amendment providing for the benefit increases under the terminating defined benefit plan is adopted within the 60-day period ending on the plan termination date and the amendment is immediately effective.

155
Q

What occurs If benefits increases are given to participants in the terminating defined benefit instead of using a qualified replacement plan to reduce the excise tax on assets reverting to the plan sponsor from 50% to 20%?

A
  • Aggregate present value of the increases must not be less than 20% of the maximum reversion amount;
  • Allocation of excess assets (benefit increases) cannot discriminate in favor of highly compensated employees; and
  • Plan amendment to allow for benefit increases must have effective date of plan termination date; that is be immediately effective.
156
Q

What type of plan constitutes an abandoned or orphan plan?

A
  • To which no contributions have been deposited nor from which no distributions have been made for a period of at least 12 consecutive months; or
  • With regard to which other facts and circumstances are present (such as the bankruptcy of the plan sponsor) to suggest that the plan is or may become abandoned by its sponsor.
157
Q

Who is authorized to take action when an abandoned plan exists with regard to the plan to maintain its qualification or to distribute benefits?

A

A qualified termination administrator (QTA) to take the action necessary to terminate and distribute benefits from an abandoned plan. A QTA is someone who is:

  • Qualified to serve as a trustee or issuer of an individual retirement plan under the IRC; and
  • Holds the assets of the plan that is considered to be abandoned

A QTA generally must be a financial institution or an affiliate of such an institution.

158
Q

What reasonable efforts must a QTA make to locate or communicate with a plan sponsor?

A

Under the DOL procedures, the QTA must make reasonable efforts to locate or communicate with the plan sponsor and determine after those efforts are taken that the sponsor no longer exists cannot be located or is unable to maintain the plan. These efforts must include at least sending a certified letter (or other communication requiring acknowledgement of receipt) to the sponsor’s last known address and to the person designated as the sponsor’s agent for service of legal process (if the sponsor is a corporation).

159
Q

What elements must be included in the communication from the QTA to the plan sponsor?

A
  • The plan name;
  • The name and address of the QTA;
  • The account number or other identification information for the plan;
  • A statement that the plan may be terminated if the plan sponsor fails to contact the QTA within 30 days;
  • The name address and telephone number of who the sponsor must contact;
  • A statement that if the plan is terminated notice of the termination will be provided to EBSA;
  • A statement that The US Department of Labor requires that you be informed that as a fiduciary or plan administrator or both you may be personally liable for costs, civil penalties, excise taxes etc. as a result of your acts or omissions with respect to this plan. The termination of this plan will not relieve you of your liability for any such costs penalties taxes etc.; and
  • A statement that the plan sponsor may contact the DOL for more information about the federal law governing the termination and winding-up process for abandoned plans and the telephone number of the appropriate EBSA contact person.
160
Q

What must the QTA furnish to the DOL?

A

A notice of plan abandonment. This must be signed by the QTA and contain additional information identifying the plan, confirming that the sender qualifies as a QTA, advising the DOL that the QTA has determined the plan to be abandoned and acknowledging the QTAs election to terminate and wind up the plan. Other items that must be disclosed in this notice include the number of participants, plan asset information, and information about the other service providers to the plan.

161
Q

For an abandoned plan, who must wind up the plan?

A

The QTA is then responsible for winding up the plan. This includes updating the plan records calculating benefits allocating expenses and unallocated assets notifying participants and paying the benefits. The QTA may also engage the services of other service providers as necessary and may pay their reasonable fees from the plan. The QTA procedures also include a prohibited transaction exemption that permits the QTA to pay its own reasonable fees from the plan.

162
Q

When must the QTA file the Special Terminal Report for Abandoned Plans with the DOL?

A

Not later than the end of the second month following the month in which the plan is terminated and paid out

163
Q

How can the QTA limit his or her liability?

A

By acting prudently in its activities including the selection and monitoring of other service providers or the selection of annuity providers in the wind-up process.

164
Q

For what purpose are the guidelines set forth in employment status under section 530(d) of the Revenue Act of 1978?

A

Determining the employment status of a taxpayer

165
Q

When is an individual considered to be an employee?

A

An individual is an employee for federal employment tax purposes if the individual has the status of an employee under the usual common law rules applicable in determining the employer-employee relationship.

The relationship of employer and employee exists when the person or persons for whom the services are performed have the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. That is an employee is subject to the will and control of the employer not only as to what shall be done but as to how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if the employer has the right to do so.

166
Q

What are the twenty factors or elements that aid in determining whether an individual is an employee under the common law rules?

A

These twenty factors or elements have been identified as indicating whether sufficient control is present to establish an employer-employee relationship:

1) Instructions
2) Training
3) Integration
4) Services rendered personally
5) Hiring, supervising and paying assistants
6) Continuing relationship
7) SET HOURS OF WORK
8) FULL TIME REQUIRED
9) DOING WORK ON EMPLOYER’S PREMISES
10) ORDER OF SEQUENCE SET
11) ORAL OR WRITTEN REPORTS
12) PAYMENT BY HOUR WEEK MONTH
13) PAYMENT OF BUSINESS AND/OR TRAVELING EXPENSES
14) FURNISHING OF TOOLS AND MATERIALS
15) SIGNIFICANT INVESTMENT
16) REALIZATION OF PROFIT OR LOSS
17) WORKING FOR MORE THAN ONE FIRM AT A TIME
18) MAKING SERVICE AVAILABLE TO GENERAL PUBLIC
19) RIGHT TO DISCHARGE
20) RIGHT TO TERMINATE

167
Q

What are the twenty factors or elements that aid in determining whether an individual is an employee under the common law rules?

A

These twenty factors or elements have been identified as indicating whether sufficient control is present to establish an employer-employee relationship:

1) Instructions
2) Training
3) Integration
4) Services rendered personally
5) Hiring supervising and paying assistants
6) Continuing relationship
7) SET HOURS OF WORK
8) FULL TIME REQUIRED
9) DOING WORK ON EMPLOYER’S PREMISES
10) ORDER OF SEQUENCE SET
11) ORAL OR WRITTEN REPORTS
12) PAYMENT BY HOUR WEEK MONTH
13) PAYMENT OF BUSINESS AND/OR TRAVELING EXPENSES
14) FURNISHING OF TOOLS AND MATERIALS
15) SIGNIFICANT INVESTMENT
16) REALIZATION OF PROFIT OR LOSS
17) WORKING FOR MORE THAN ONE FIRM AT A TIME
18) MAKING SERVICE AVAILABLE TO GENERAL PUBLIC
19) RIGHT TO DISCHARGE
20) RIGHT TO TERMINATE

168
Q

Describe the Instructions element of determining if someone is an employee.

A

A worker who is required to comply with other persons’ instructions about when where and how he or she is to work is ordinarily an employee. This control factor is present if the person or persons for whom the services are performed have the RIGHT to require compliance with instructions.

169
Q

Describe the Training element of determining whether or not someone is an employee

A

Training a worker by requiring an experienced employee to work with the worker by corresponding with the worker by requiring the worker to attend meetings or by using other methods indicates that the person or persons for whom the services are performed want the services performed in a particular method or manner.

170
Q

Describe the Integration element of determining whether or not someone is an employee

A

Integration of the worker’s services into the business operations generally shows that the worker is subject to direction and control. When the success or continuation of a business depends to an appreciable degree upon the performance of certain services the workers who perform those services must necessarily be subject to a certain amount of control by the owner of the business.

171
Q

Describe the SERVICES RENDERED PERSONALLY element of determining whether or not someone is an employee

A

If the Services must be rendered personally presumably the person or persons for whom the services are performed are interested in the methods used to accomplish the work as well as in the results.

172
Q

Describe the HIRING SUPERVISING AND PAYING ASSISTANTS element of determining whether or not someone is an employee

A

If the person or persons for whom the services are performed hire supervise and pay assistants that factor generally shows control over the workers on the job. However, if one worker hires, supervises and pays the other assistants pursuant to a contract under which the worker agrees to provide materials and labor and under which the worker is responsible only for the attainment of a result this factor indicates an independent contractor status.

173
Q

Describe the CONTINUING RELATIONSHIP element of determining whether or not someone is an employee

A

A continuing relationship between the worker and the person or persons for whom the services are performed indicates than an employer-employee relationship exists. A continuing relationship may exist where work is performed at frequently recurring although irregular intervals.

174
Q

Describe the SET HOURS OF WORK element of determining whether or not someone is an employee

A

The establishment of set hours of work by the employer is a factor indicating control.

175
Q

Describe the FULL TIME REQUIRED element of determining whether or not someone is an employee

A

If the worker must devote substantially full time to the business of the person or persons for whom the services are performed such person or persons have control over the amount of time the worker spends working and impliedly restrict the worker from doing other gainful work. An independent contractor on the other hand is free to work when and for whom he or she chooses.

176
Q

Describe the DOING WORK ON EMPLOYER’S PREMISES element of determining whether or not someone is an employee

A

If the work is performed on the premises of the person or persons for whom the services are performed that factor suggests control over the worker especially if the work could be done elsewhere. Work done off the premises of the person or persons receiving the services such as at the office of the worker indicates some freedom from control. However this fact by itself does not mean that the worker is not an employee. The importance of this factor depends on the nature of the service involved and the extent to which an employer generally would require that employees perform such services on the employer’s premises. Control over the place of work is indicated when the person or persons for whom the services are performed have the right to compel the worker to travel a designated route to canvass a territory within a certain time or to work at specific places as required.

177
Q

Describe the ORDER OF SEQUENCE SET element of determining whether or not someone is an employee

A

If a worker must perform services in the order set by his employer that factor shows that the worker is not free to follow the worker’s own pattern of work but must follow the established routines and schedules of the employer. Often because of the nature of an occupation, the person or persons for whom the services are performed do not set the order of the services or set the order infrequently. It is sufficient to show control if the employer retains the right to do so.

178
Q

Describe the ORAL OR WRITTEN REPORTS element of determining whether or not someone is an employee

A

A requirement that the worker submit regular or written reports to the person or persons for whom the services are performed indicates a degree of control.

179
Q

Describe the PAYMENT BY HOUR WEEK MONTH element of determining whether or not someone is an employee

A

Payment by the hour, week or month generally points to an employer-employee relationship provided that this method of payment is not just a convenient way of paying a lump sum agreed upon as the cost of a job. Payment made by the job or on straight commission generally indicates that the worker is an independent contractor.

180
Q

Describe the PAYMENT OF BUSINESS AND/OR TRAVELING EXPENSES element of determining whether or not someone is an employee

A

If the person or persons for whom the services are performed ordinarily pay the worker’s business and/or traveling expenses the worker is ordinarily an employee.

181
Q

Describe the FURNISHING OF TOOLS AND MATERIALS element of determining whether or not someone is an employee

A

The fact that the employer furnishes significant tools, materials and other equipment tends to show the existence of an employer-employee relationship.

182
Q

Describe the SIGNIFICANT INVESTMENT element of determining whether or not someone is an employee

A

If the worker invests in facilities that are used by the worker in performing services and are not typically maintained by employees (such as the maintenance of an office rented at fair value from an unrelated party) that factor tends to indicate that the worker is an independent contractor.

183
Q

Describe the REALIZATION OF PROFIT OR LOSS element of determining whether or not someone is an employee

A

A worker who can realize a profit or suffer a loss as a result of the worker’s services (in addition to the profit or loss ordinarily realized by employees) is generally an independent contractor but the worker who cannot is an employee. The risk that a worker will not receive payment for his or her services is common to both independent contractors and employees and thus does not constitute a sufficient economic risk to support treatment as an independent contractor.

184
Q

Describe the WORKING FOR MORE THAN ONE FIRM AT A TIME element of determining whether or not someone is an employee

A

If a worker performs more than de minimis services for a multiple of unrelated persons or firms at the same time that factor generally indicates that the worker is an independent contractor. But remember, a worker who performs services for more than one person may be an employee of each of the persons especially where such persons are part of the same service arrangement.

185
Q

Describe the MAKING SERVICE AVAILABLE TO GENERAL PUBLIC element of determining whether or not someone is an employee

A

The fact that a worker makes his or her services available to the general public on a regular and consistent basis indicates an independent contractor relationship.

186
Q

Describe the RIGHT TO DISCHARGE element of determining whether or not someone is an employee

A

The right to fire a worker is a factor indicating that the worker is an employee. An employer exercises control through the ability to fire which causes the worker to obey the employer’s instructions. An independent contractor on the other hand cannot be fired so long as the independent contractor produces a result that meets the contract specifications.

187
Q

Describe the RIGHT TO TERMINATE element of determining whether or not someone is an employee

A

If the worker has the right to quit at any time, that factor indicates an employer-employee relationship.

188
Q

What does Rev. Rul. 75-41 conclude about individuals performing services for a physician’s professional service corporation?

A

The individuals are employees of the corporation for federal employment tax purposes.

189
Q

What does Rev. Rul. 70-309 conclude about oil well pumpers under contracts that characterize such individuals as independent contractors?

A

The pumpers are employees of the corporation because the pumpers perform their services pursuant to an arrangement that gives the corporation the right to exercise whatever control is necessary to assure proper performance of the services; the pumpers’ services are both necessary and incident to the business conducted by the corporation; and the pumpers are not engaged in an independent enterprise in which they assume the usual business risks but rather work in the course of the corporation’s trade or business.

190
Q

What exception with respect to the treatment of certain workers does new subsection (d) added to section 530 of the 1978 Act provide?

A

Section 530(d) provides that section 530 shall not apply in the case of an individual who pursuant to an arrangement between the taxpayer and another person provides services for such other person as an engineer designer drafter computer programmer systems analyst or other similarly skilled worker engaged in a similar line of work.

It merely eliminates the employment tax relief under section 530(a) of the 1978 Act that would otherwise be available to a taxpayer with respect to those workers who are determined to be employees of the taxpayer under the usual common law rules.

191
Q

Which code section governs corporations under common control?

A

IRC 414(b)

192
Q

True or False: If a Canadian company owns 90% of 2 U.S. Corporations, there is a parent-subsidiary controlled group.

A

True. The foreign parent ownership does not change the controlled group rules.

193
Q

True or false: Tax exempt entities cannot be part of a controlled group or under common control because no one owns tax exempt entities.

A

False. See IRC 414(c).

194
Q

When does a brother sister controlled group exist?

A
  1. 5 or fewer common owners own at least 80% of the corporation and2. There is more than 50% identical ownership. Test 1 is often called common control test and test 2 is often called effective control.
195
Q

What does the Vogel Fertilizer case hold?

A

To be considered for the common control and effective control test, must own something in each company. Ie disregard 0% owners.

196
Q

What is an A-org ASG?

A

There must be the following:

  1. First Service Organization (FSO) - must be a service organization. If a corporation, must be a professional service corporation.
  2. A-Org- Must be a service organization.
  3. The A-Org must be regularly associated or provides services for FSO.
  4. A-Org or its HCEs must own portion of FSO.
197
Q

How is ownership attributed between children and parents for purposes for ASG determination?

A

Attributed regardless of age- different than controlled group rules.

198
Q

What are the requirements for a line of business (LOB) to be a separate line of business (SLOB)?

A
  1. separate organizational unit
  2. Separate financial unit
  3. Separate workforce
  4. Separate management
199
Q

How does an employer notify IRS that it intends to use QSLOBs?

A

File form 5310-A

200
Q

To be a QSLOB what is the minimum number of employees that a SLOB must have?

A

50 in each day of the testing year. Union employees are included. The following employees are excluded: 1 regularly work less than 17 1/2 hours per week 2. Work less than 6 months in a year 3. Under age 21 4. Have not completed 6 months of service

201
Q

What are the three requirements for a SLOB to be a QSLOB?

A
  1. Minimum 50 employee
  2. File 5310-A
  3. Satisfy an administrative scrutiny requirement
202
Q

What is the exception to spousal attribution rules for controlled group?

A

Must satisfy all 4 conditions: 1. No direct owner in spouse business 2. Not a director, employee or does not participate in management spouse business 3. No more than 50% derived passive income 4. No distribution restriction of spouse’s stock in favor of spouse or minor children (rare)

203
Q

How is adult child stock attributed for controlled group rules?

A

Parent treated as owning stock of adult child only if parent owns or is attributed more than 50% of stock. Converse applies. Similar rule for grandparents and grandchildren.

204
Q

At what age is someone considered an adult child for cg rules?

A

Age 21 and older

205
Q

For cg rules when is a corporation’s stock attributed to its shareholders?

A

When the person owns 5% or more of the corporation, he is attributed pro rata share. Similar rule for partnerships.

206
Q

What is IRC 415(h)?

A

For parent subsidiary controlled groups only - does not apply to brother sister controlled groups. Only one 415 limit if more than 50%.

207
Q

What are the requirements to be a B-org ASG?

A
  1. significant portion of business of the B org is for FSO or its A-orgs 2. At least 10% or more of B org owned by HCEs of FSO 3. Services historically performed by FSO or its A org. Note that B org does not need to be a service org.
208
Q

Which industries are automatically a service industry?

A

Health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or insurance.

209
Q

What is a service organization for ASG purposes?

A
  1. Engages in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting and insurance. Or 2. Capital is not a material income producing factor
210
Q

Is a medical publisher a service organization?

A

No. Supplier of health equipment and books do not fall make it in the health industry. Capital is a material income producing factor.

211
Q

How much overlapping ownership is required for a management function group?

A

None!!

212
Q

What is a management ASG?

A

Very little guidance in regulations, but when one company’s primary business is the management of another company. Such as a manager of a band and that is his only client.

213
Q

Is it possible to have an ASG with no overlapping ownership?

A

Yes, but only a management ASG.