Chapter 3: Controlled Groups and Affiliated Service Groups

Question 1

A parent-subsidiary controlled group exists if the companies are connected through at least 50 percent stock ownership.

True or False?

Answer 1

False. The companies must be connected by at least 80 percent of stock ownership to satisfy the parent-subsidiary requirements.

Question 2

A brother-sister controlled group exists if either the common ownership or the effective control test is satisfied.

True or False?

Answer 2

False. Both the common ownership and the effective control tests must be satisfied for a brother-sister controlled group to exist.

Question 3

Attribution between spouses does not apply if the couple is childless.

True or False?

Answer 3

False. For the spousal exception from attribution to apply, the individuals must not have direct ownership in each other’s businesses, they must not participate in the management of each other’s businesses, no more that 50 percent of the gross income of the businesses may be derived from passive investments, and the spouse’s ownership interest may not be subject to disposition restrictions. In addition, whether the individuals reside in a community property state may affect the ability to satisfy the exception.

Question 4

Attribution, under §318, from a parent to a minor child applies only if the parent owns more than 50 percent of the business.

True or False?

Answer 4

False. Attribution applies to minor children regardless of the amount owned by the parent.

Question 5

Company A and Company B are a controlled group. The workforces of both companies are considered when testing each company’s plan for coverage requirements.

True or False?

Answer 5

True

Question 6

A financial institution is considered a service organization because it provides a service of lending money.

True or False?

Answer 6

False. A financial institution is not a service organization.

Question 7

In order for an A-Org group to exist, the A-Organization must have at least a 10 percent ownership interest in the FSO.

True or False?

Answer 7

False. While an A-Org group must have some ownership interest in the FSO, there is no minimum percentage requirement.

Question 8

If an FSO is a corporation, it always must be a professional service corporation for affiliated service group rules.

True or False?

Answer 8

False. If an FSO is a corporation, it need only be a professional service corporation if it is part of an A-Org group. This requirement does not apply to B-Org groups.

Question 9

If two or more entities are deemed to be an affiliated service group, they do not need to be tested together for top-heavy purposes as long as each is not top-heavy on its own.

True or False?

Answer 9

False. Plans must be aggregated for top-heavy purposes.

Question 10

If two or more entities are deemed to be an affiliated service group and each entity sponsors its own plan, each plan must pass coverage.

True or False?

Answer 10

True

Question 11

For purposes of determining any type of affiliated service group, ownership is attributed from a grandchild to a grandparent, but not from a grandparent to a grandchild.

True or False?

Answer 11

True

Question 12

Which of the following conditions does not need to be met to avoid spousal attribution for controlled group purposes?

A. The spouse must not have any direct ownership in the business.
B. The spouse must not be a director or employee of the business.
C. The spouse must not participate in the management of the business.
D. The spouse must not inherit the business upon death of the business owner.

Answer 12

D. The business owner’s interest cannot be subject to legal restrictions on sale or transfer without the approval of the spouse (for example, an option to buy the business owner’s interest or a right of first refusal under which the spouse gets the first opportunity to buy the interest before it is sold to anyone else). However, this does not mean that the spouse cannot inherit the business.

Question 13

Which of the following statements regarding attribution for controlled group purposes is NOT TRUE?

A. Ownership is attributed from husband to wife unless the business is wholly owned by the husband and certain requirements are met.
B. Ownership is attributed from a minor child to a parent.
C. Ownership is attributed from an adult child to a parent if the parent owns more than 50 percent of the corporation.
D. Ownership is attributed from a father-in-law to a son-in-law.

Answer 13

D. Ownership may be attributed from a father to a daughter but would not be attributed to the daughter’s husband.

Question 14

Which of the following IRC sections does not consider controlled group members as a single-employer?

A. Eligibility and coverage (IRC §410)
B. Deduction (IRC §404)
C. Vesting (IRC §411)
D. Annual additions (IRC §415)

Answer 14

B. Generally, for deductibility purposes, controlled group members are not treated as a single-employer. If the members participate in the same plan, they may be treated as a single-employer.

Question 15

Which of the following statements regarding affiliated service groups is NOT TRUE?

A. An FSO can be part of both an A-Org group and a B-Org group.
B. An FSO of an A-Org group must be a professional service organization.
C. An A-Organization must be a service organization.
D. An A-Organization must have some ownership in the FSO.

Answer 15

B. FSOs in an A-Org group must be professional service organizations only if they are corporations. If the FSO is a partnership or a sole proprietorship, this rule does not apply.

Question 16

Which of the following is not an effect of being an affiliated service group?

A. An employee’s service with all group members is credited when determining plan eligibility.
B. Plans must satisfy coverage requirements considering all employees in the affiliated service group.
C. HCE status is determined by looking at the ownership in each entity separately.
D. Annual additions for all plans in the group are aggregated to determine if the IRC §415 limits have been exceeded.

Answer 16

C. HCE status is determined by treating the affiliated service group members as a single-employer.

Question 17

Which of the following statements regarding attribution in determining affiliated service groups is NOT TRUE?

A. Ownership interest is attributed between spouses.
B. Ownership interest is attributed from parent to adult child only if the parent owns more than 50 percent of the company.
C. Ownership interest is not attributed between siblings.
D. Ownership interest is attributed from grandchild to grandparent.

Answer 17

B. Ownership is attributed from parent to child no matter the age—the adult reference in the answer was a red herring. Do not confuse the attribution under IRC §318 used for the affiliated service group rules with that of IRC §1563 used for controlled group determinations.

Question 18

Which of the following activities would not be considered a management function?

A. Supervisory roles
B. Hiring employees
C. Investing 401(k) plan assets
D. Setting employee compensation

Answer 18

C. The law does not define management functions. However, the term should be interpreted under common business practices. Investing 401(k) assets would not be a management function. It would be a role for the plan trustee.

Question 19

Based on the following information, determine brother-sister controlled group status:
* The individuals listed are not related

Ind WCorp XCorp YCorp
A 50% 40% 56%
B 0% 19% 17%
C 50% 16% 11%
D 0% 25% 16%
Tot 100% 100% 100%

A. None
B. W and X only
C. W and Y only
D. X and Y only

Answer 19

D. Corporations W and X have common ownership of 56 percent and, therefore, do not satisfy the common control test even though they satisfy the effective control test (56 percent). Corporations X and Y have common ownership of 100 percent and effective control of 84 percent so the controlled group requirements are satisfied. Corporations W and Y have common ownership of 67 percent and, therefore, do not satisfy the common control test, even though they satisfy the effective control test (61 percent).