Any type of business entity can sponsor a qualified retirement plan, from a sole proprietorship to a partnership of corporations. When entities are related, either through ownership or business affiliation, there are special rules that determine whether the entities can be treated as a standalone employer, or as one combined employer for retirement plan purposes.
The consequence of employers being related is that they are considered one plan for benefit limits and for non-discrimination testing purposes. Even if the businesses are unrelated in purpose or industry, they cannot be considered separately for a qualified plan. While they can still sponsor their own plans, the plans must be combined for testing.
A controlled group of employers are related through common ownership. Direct ownership of one entity by another is known as a parent-subsidiary relationship. When one business owns at least 80% of another, then they are considered under common control. For example, if corporation X owned 100% of corporation Y, which in turn owned 80% of corporation Z, all three would be a controlled group. If Y only owned 75% of Z, then only X and Y would be considered under common control.
Another type of controlled group is a “brother-sister” relationship. This is where five or fewer individuals (includes trusts and estates) satisfy an 80% or more common ownership test and a more than 50% identical ownership test. These tests are illustrated by the following example:
Jim and Emily are not counted since they do not have ownership in each entity. Collectively, Kathy, Bob and Carol own over 80% of each entity. Their identical ownership exceeds 50%, which makes Corporation D and E a controlled group. The type of entity (corporation, partnership, LLC) does not matter.
There are many different permutations of ownership that make the determination of controlled group status difficult. To complicate matters, ownership includes both direct ownership, and attributed ownership to certain family members. Thus a spouse or child can be considered an owner of a business even if they have no direct involvement or ownership.
Another type of related employer is an Affiliated Service Group (“ASG”). This involves two or more organizations with a service relationship, but not necessarily common ownership. Types of ASGs include “A-org groups,” “B-org groups,” and “Management groups.” The analysis of ASG status is complicated and beyond the scope of this article, but the following would be an example of a group of employers related by service:
Ten physicians each own their own medical corporations, and are the only employee of their corporation. Each of the corporations own 10% of ABC Medical Center. ABC Medical Center is an LLC, and employs all of the employees necessary to operate the center. The physician corporations each pay a share of the operating expenses to ABC Medical Center and receive their proportionate share of profits. The medical center is where the physicians see all their patients, do the billing, and remit payments back to the individual corporations. This is not a controlled group, but would be considered an affiliated service group. Any retirement plans sponsored by the individual corporations would need to include the surgery center employees for nondiscrimination benefit testing purposes.
This has been a brief description of the rules surrounding this complicated subject.
For detailed information on the rules governing controlled groups and affiliated service groups, the IRS has published the following guidance:
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