How Related Employer Relationships Affect Retirement Plans
By Michelle Freiholtz
What is a related employer relationship?
A related employer relationship is a controlled group or an affiliated service group. Controlled groups are two or more trades or businesses under common control. The three types of controlled groups are parent-subsidiary, brother-sister, and combined.
Affiliated service groups are more subjective. They are generally defined as two or more organizations that have a service relationship and, in some cases, an ownership relationship. Potential service organizations could include, but are not limited to, law firms, medical practices, and accounting firms.
Why does it matter if the employer is part of a related employer relationship for retirement plan purposes?
The federal government created laws to treat certain groups of companies as a single employer, preventing employers from creating multiple entities to avoid taxation or avoid providing benefits. These were incorporated into ERISA law, resulting in rules requiring retirement plans to meet coverage and nondiscrimination standards. Generally, qualified retirement plans cannot disproportionately favor highly compensated employees (HCEs) in relation to non-highly compensated employees, or arbitrarily exclude employees from receiving benefits. Properly identifying a controlled group or affiliated service group helps ensure a plan will maintain its tax qualification.
What should the employer consider in terms of the plan?
The employer should consider the following questions.
Has the employer performed a controlled group or affiliated service group analysis to properly identify related employer relationships?
Is the plan on the appropriate plan document to accommodate its goals and objectives?
If there are multiple plans, are procedures in place to accommodate specialized compliance testing?
If there are more than 100 employees, is there an advantage to maintaining multiple plans or a single plan (think Form 5500 audits, fees, coordination of administration)?
How are participants affected?
Years of service with all employers within the relationship are counted for eligibility and vesting purposes.
Compensation received from all group members is counted toward the compensation cap.
Annual additions limits are restricted to one limit ($57,000 for 2020) for all related employers treated as a single employer.
Plan loan eligibility may be affected by loans received from other related employer plans.
Separating from service with one member of the controlled group to work for another does not constitute a triggering event for distribution purposes.
Can members of a related employer relationship maintain more than one plan?
Yes. Each member could have a separate plan, or two or more could have a single plan. Specialized testing generally is required when multiple plans in a related employer relationship are maintained.
When should an employer evaluate if it has to take related employer considerations into account?
The employer should evaluate relationships anytime there is a change in ownership, merger, or acquisition, or change in services provided or received. The employer may need to consult with a tax advisor or ERISA attorney.
