Chapter 3 CONTROLLED GROUPS AND AFFILIATED SERVICE GROUPS

Question 1

What are the 2 types of related employer groups?

Answer 1

Controlled Group
Affiliated Service group

Question 2

What are the 2 types of controlled groups

Answer 2

Parent-Subsidiary Group
Brother Sister Group

Question 3

What is the parent-subsidiary controlled group definition

Answer 3

Parent company owns at least 80% of another entity

Parent Subsidiary Controlled group can be tiered - A owns 90% of B and B owns 85% C, A,B &C are all in a controlled group

Question 4

Describe how a foreign entity owning domestic companies can create a controlled group

Answer 4

Parents company can be a foreign entity, non-resident alien exclusion keep parent company’s ees out of the plan but the domestic subsidiaries are subject to controlled group rules

Question 5

Related employers are treated as single employer for _________

Answer 5

Companies A,B & C are in a controlled group/ ASG:
Service with all three is counted for eligibility & vesting in any company’s plan

coverage - all member of workforce are included in each plan’s coverage test, separate plan can be permissively aggregated to pass coverage

non-discrimination - all member of the controlled group/ASG are counted for each plans’ testing and determining HCEs

annual additions - contributions to all plans in the controlled group/ASG are aggregated for 415 test

Top heavy - all members of the controlled group/ASG are included for determining key employees and the top heavy ratio. All plans in the related group are included to determine required aggregation group and plan that can be permissively aggregated

Compensation limit – pay from all companies in related employer group is aggregated

401(a)(30) – employers are required to monitor 401(a)(30) by aggregating elective deferrals to all plan in the group

SEP/SIMPLE - must cover all employees in the realted employer group, 100 partic max applies to employees of all employers in the group

Question 6

Related employers are not treated as single employers for __________

Answer 6

404 Deduction limit – unless 2 or more member participate in the same plan

Question 7

What is the special provision for 415 limit and parent-subsidiary group?

Answer 7

For purposes of applying the limitations under IRC §415, a parent-subsidiary relationship exists if the parent owns more than 50 percent of the subsidiary

Question 8

Define Brother-Sister controlled group

Answer 8

5 or fewer common owners satisfy both an 80 percent common control test and a 50 percent effective control test.

A common owner must be an individual, a trust or an estate.

Question 9

Define the 80% Common Control Test

Answer 9

the combined ownership of the common owners in each business equals or exceeds 80 percent

common owners = those with at least some ownership (directly or by attribution) in each business being tested

see example on p 65

Question 10

Define 50% effective control test

Answer 10

the combined identical ownership is at least 50%

the same 5 or fewer common owners from the 80% test are tested for the effective control test

identical ownership - the least of the individual ownership in the companies being tested

see examples on p 68

Question 11

Hybrid situations:

common parent organization in a parent-subsidiary group is also part of a brother-sister group, are the 2 groups part of a single related employer group?

Answer 11

Yes

Question 12

Hybrid situations:

subsidiary organization in a parent-subsidiary group is also part of a brother-sister group, are the 2 groups part of a single related employer group?

Answer 12

No

Question 13

ownership interest for each business type:

Corporation
Partnership
LLC
Sole Proprietorship
Trust/Estate

Answer 13

Coporationorp - stock

partnership - capital/profit interest

LLC - membership interest

LLC taxed as a partnership - capital/profit interests

sole Proprietorship - 100 owner

Trust/Estate - actuarial interest in the trust

Question 14

Required %s of stock for controlled group test can be satisfied on the basis of
voting power, or;
value

How does this impact parent subsidiary test & brother sister test

Answer 14

parent subsidiary test satisfied if parent co. owns at least 80% or voting power or value of subsidiary’s stock

any of the following four combinations will satisfy the brother-sister test:
1. Common owners own at least 80 percent of combined voting power, and their combined identical ownership (also based on voting power) is more than 50 percent;
2. Common owners own at least 80 percent of combined value, and their combined identical ownership (also based on value) is more than 50 percent;
3. Common owners own at least 80 percent of combined voting power, and their combined identical ownership (based on value) is more than 50 percent; or
4. Common owners own at least 80 percent of combined value, and their combined identical ownership (based on voting power) is more than 50 percent.

Question 15

What are the 3 sets of attribution rules for retirement plans

Answer 15

1. IRC §267 attribution = prohibited transaction (PT) rules.
2. IRC §318 attribution = determining affiliated service groups & identifying HCEs and key employees.
3. IRC §1563 attribution = determining controlled groups

Question 16

Describe IRC §1563 ownership

Answer 16

Attribution between spouses unless all of the following are true
A is the owner and B is the spouse, no attribution if
1. B is not a director, employee or involved in management
2. < 50% if business income is from passive investments
3. B has no direct ownership in the business
4. A’s ownership is not subject to disposition restrictions in favor of B (e.g. right of 1st refusal)

Attribution between parent and minor child (under age 21). No attribution after 2024 PY under SECURE 2.0

Attribution between parent and adult child
parent to child if child has >50% direct ownership
child to parent if parent has >50% direct ownership (can include attribution from spouse)

Attribution between grandparent and grandchild (any age)
grandparent to grandchild if child has >50% direct ownership
grandchild to grandparent if parent has >50% direct ownership (can include attribution from spouse)

No attribution between siblings

Question 17

Define Affiliated service group

Answer 17

2 or more organizations with a service relationship and in some cases an ownership relationship

Question 18

What are the 3 types of ASGs

Answer 18

A-Org
B-Org
Management Group

Question 19

Define A-Org Group

Answer 19

Consists of:
1. First Service Organization (FSO)
-must be a service organization
- if FSO is a corp if must be a professional service corp/organization,
-at least one shareholder licensed for professional service that org provides

2. A-Org
   - has ownership in FSO
   -must be a service org
   - regularly performs services for FSO or is affiliated with FSO in providing services to a 3rd party (e.g. surgery group and anesthesia group)

Question 20

Define service organization

Answer 20

-income primarily from fees for service, commission, other compensation for service
- any of these fields are considered service: Health, law, engineering, architecture,
accounting, actuarial science, performing arts, consulting & insurance
-Banks & other fiancial instituions are not service rogs for this purpose

Question 21

Define a B-Org Group

Answer 21

Consists of:
1. First Service Organization (FSO)
-must be a service organization
- if FSO is a corp does not have to be professional service corp/organization like in A-Org group

2. B-Org
   - Derive a significant portion of its business from the performance of services for the FSO, or for the A-Organization(s) related to that FSO, or any combination
   -Perform services for the FSO or A-Organization that are the type historically performed by employees of FSO or A-Org
   - Owned at least 10 percent by persons who are HCEs of the FSO or A-Organization

Question 22

What are the Safe Harbor Tests for the B- Org to satisfy “ significant portion of its business from the performance of services for the FSO, or for the A-Organization(s)”

Answer 22

Service Receipts Safe harbor Test:
B org’s services are no significant if service receipts percentage is less than 5%
Service receipts percentage=gross receipts from services for FSO or A-Org/gross receipts from all services

Total Receipts Safe Harbor test:
B Org Services are significant if total receipts percentage is 10% or more
total receipts percentage=gross receipts from services for FSO or A-Org/gross receipts (regardless of whether they were for services)

Question 23

What is a management group?

Answer 23

Consists of a management organization and a recipient organization

The management org’s principal business is providing management services to the recipient org e.g. hiring/firing employees, setting compensation, employee supervision

Question 23

How can you measure whether a management organization’s principal business is providing management functions to the recipient?

Answer 23

Gross Receipts from management functions for recipient/gross receipts>50%

Question 24

A & B are in a management group. A is the management organization and B is the recipient. B is in another related group with C.
Are A,B & C in one ASG?

Answer 24

Yes

Question 25

What is double attributions? Is it allowed?

Answer 25

A is B’s mother. B is married to C. A is 100% owner of XYZ. B is also 100% owner by parent-child attribution but C is not an owner because the 100% cannot be attributed again from B to C.

Question 26

Explain 318 attribution for determining ASGs

Answer 26

*Attribution between spouses;
*Attribution from parent to child;
*Attribution from child to parent;
*Attribution from grandchild to grandparent;
*No attribution from grandparent to grandchild; and
*No attribution between siblings.