Chapter 3 CONTROLLED GROUPS AND AFFILIATED SERVICE GROUPS Flashcards
What are the 2 types of related employer groups?
Controlled Group
Affiliated Service group
What are the 2 types of controlled groups
Parent-Subsidiary Group
Brother Sister Group
What is the parent-subsidiary controlled group definition
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
Describe how a foreign entity owning domestic companies can create a controlled group
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
Related employers are treated as single employer for _________
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
Related employers are not treated as single employers for __________
404 Deduction limit – unless 2 or more member participate in the same plan
What is the special provision for 415 limit and parent-subsidiary group?
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
Define Brother-Sister controlled group
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.
Define the 80% Common Control Test
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
Define 50% effective control test
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
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?
Yes
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?
No
ownership interest for each business type:
Corporation
Partnership
LLC
Sole Proprietorship
Trust/Estate
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
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
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.
What are the 3 sets of attribution rules for retirement plans
- IRC §267 attribution = prohibited transaction (PT) rules.
- IRC §318 attribution = determining affiliated service groups & identifying HCEs and key employees.
- IRC §1563 attribution = determining controlled groups
Describe IRC §1563 ownership
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
Define Affiliated service group
2 or more organizations with a service relationship and in some cases an ownership relationship
What are the 3 types of ASGs
A-Org
B-Org
Management Group
Define A-Org Group
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
- 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)
Define service organization
-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
Define a B-Org Group
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
- 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
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)”
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)
What is a management group?
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
How can you measure whether a management organization’s principal business is providing management functions to the recipient?
Gross Receipts from management functions for recipient/gross receipts>50%
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?
Yes
What is double attributions? Is it allowed?
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.
Explain 318 attribution for determining ASGs
*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.
