Related Employer Relationships – The Basics
By Bill Ellis
In the context of this article, the term “related employer” refers to two or more businesses that are part of a controlled group or affiliated service group (ASG) relationship.
What does it mean to be part of a controlled group of businesses?
As explained in Internal Revenue Code Sections (IRC Secs.) 414(b) and 414 (c), a controlled group may arise when there are two or more businesses under common ownership or control.
In general, how is controlled group status determined?
A parent-subsidiary controlled group is a type of controlled ownership in which there is one parent organization that owns 80 percent or more of at least one subsidiary organization. This is known as “controlling interest.” In a situation where there is more than one subsidiary organization, 80 percent of those subsidiary organizations must be owned (individually or in aggregate) by other members of the parent-subsidiary controlled group.
In a brother-sister controlled group, the focus of ownership shifts more to individuals, estates, or trusts that have an ownership interest in more than one organization. Within a brother-sister controlled group, the same five or fewer persons must own in aggregate at least 80 percent of each organization involved. Additionally, the same five or fewer persons considered in determining the controlling interest requirement must also have more than 50 percent ownership of each individual organization. This is known as “effective control.” When determining effective control, one must look at a person’s ownership interest only to the extent that such person owns an equal or greater amount in each of the organizations being reviewed.
A combined controlled group is just that, it is comprised of both a parent-subsidiary controlled group and a brother-sister controlled group where a common parent organization from the parent-subsidiary controlled group is also a member of a brother-sister controlled group.
How does an ASG differ from a controlled group
While still under the related employer umbrella, an ASG differs from a controlled group in that there are two or more organizations that have a service relationship with each other and sometimes, but not always, have an ownership relationship with each other.
An ASG includes three types of employer groups, an A-Organization group (A-Org), a B-Organization group (B-Org), (each named after the specific Internal Revenue Code section under which they are found) and a management group. The retirement plan implications of being a member of an ASG are the same regardless of the type of group. See IRC Sec. 414(m) and proposed Treasury Regulation 1.414(m) for more information on ASGs.
How may retirement plans be affected when related employer relationships exist?
If a company is part of a related employer relationship, the companies within the relationship are generally treated as one employer for retirement plan purposes. Therefore, an employer must consider all employees of the controlled group of businesses or affiliated service group when performing specific compliance testing and providing plan benefits.
Being part of a related employer relationship has the potential to affect a group in all sorts of ways, most notably in the form of nondiscrimination testing. It can also affect minimum vesting requirements, compensation caps, plan loan limits, hardship withdrawals, service for eligibility and vesting, distribution triggering events, and other benefits rights and features.
An employer should always proceed with caution and refer to its plan document’s definition of “Employer” when determining how the plan should operate if the employer determines that it is a part of a related employer relationship. Consulting with competent legal counsel and a competent tax advisor is always the best practice during the determination process.
