February 12th, 2024 | By Theresa Conti
The related group rules apply when determining the ownership of entities and when those entities must be grouped together and treated as one employer for qualified plan purposes. There are two types of related groups: controlled groups and affiliated service groups. Below are some basic rules and this document also incorporates the changes made under SECURE 2.0 to the “family attribution” rules. SECURE 2.0 changed these rules mostly as it relates to the spousal owners of closely held businesses is effective after December 31, 2023.
A controlled group of businesses is a type of related employer group. A controlled group typically exists when one of the following occurs:
1. Five or fewer common owners have at least 80% common ownership and more than 50% ownership in one or more other businesses
2. A business (parent) owns at least 80% of the stock of one or more other business (subsidiaries)
Whether or not entities are related under both the controlled group and affiliated service group rules is based on ownership interests and we must understand how a family or business relationship may apply to the rules and thus treat the entity as a controlled group. SECURE 2.0 changed both the spousal and minor child attribution rules.
For the spousal rule, there is an exception if the following conditions are met:
1. An individual has no direct ownership in their spouse’s business
2. The individual does not participate in the management of the other spouse’s business and is not a director, officer or employee of the spouse’s business
3. The business’s passive income is no more than 50% of its gross income (passive income includes dividends, interest, rent, royalties and annuities)
4. The ownership of the business does not have the right of first refusal on the spouse’s disposition of the business
These rules also disregard the community property laws when determining ownership. SECURE 2.0 also changed the family attribution rules so that a minor child no longer makes the parent’s ownership interest be attributable to the child and therefore a controlled group due to the parent’s flow through ownership.
Whenever a change in ownership occurs, a review of the controlled group status should occur since that can happen at any time during a plan year.
Some examples of the rules mentioned above:
1. Corporation A owns 80% of Corporation Z. Neither corporation owns any other company and therefore since there is 80% common ownership, they are a controlled group.
2. Corporation A owns 85% of Corporation Z. Corporation A also owns 100% of Corporation B and 84% of Corporation C. Since Corporation A (common parent) owns at least 80% of all three other companies, a controlled group exists.
If a controlled group of businesses exists, the organizations are treated as a single employer when applying the following plan requirements:
- Eligibility and vesting
- Minimum participation
- Coverage
- Nondiscrimination
- Contribution and benefit limits
- Top Heavy Determination
- Compensation and Deferral Limits
Common questions to be asked in determination of controlled group:
- Does the plan sponsor have an ownership interest in any other company with employees or in which the owner is self-employed? If so, provide ownership totaling 100%.
- What is the familial relationship between the owners?
- Adult child attributes to parent if the parent owns more than 50%.
- Parent attributes to adult child if adult child owns more than 50%.
- Grandchild attributes to grandparent if the grandparent owns more than 50%.
- Grandparent attributes to grandchild if the grandchild owns more than 50%.
- No sibling attribution, no aunt to niece/nephew or uncle to niece/nephew, no spouses of lineal descendant attribution.
- If multiple companies, do the other companies sponsor qualified plans?
- Not-For-Profit: If the entity has the power to appoint at least 80% of the trustees of not-for-profit and control at least 80% of the directors of a not-for-profit, a control group may exist.
- Although the foreign parent might not have employees that are eligible, the US companies are, nonetheless, part of a CG because of the common foreign parent.
An affiliated service group is considered a related group under common control in which two or more organizations have a service (and possibly an ownership) relationship. If two or more organizations are part of an affiliated service group, they are treated as a single employer when applying general qualification requirements (same as for controlled groups – see above).
There are three categories of affiliated service groups:
1. An A-Organization group consists of an organization designated as a First Service Organization (FSO)* and at least one A-Organization. Both organizations must be a service organization.
2. A B-Organization group consists of an FSO and at least one B-Organization. The FSO must be a service organization.
3. A management group consists of a management organization and a recipient organization.
*FSO is more clearly defined as “the name on the door” of the business
Here are examples of each category of affiliated service groups:
- Doctor Jones, is incorporated as a Professional Corporation (PC) and is a partner in ABC Surgical Group. Both the PC and the Surgical Group perform services for other parties. In addition, the PC is a partner in the surgical group. The PC and the Surgical Group are an A-Organization affiliated service group and all employees of both entities must be aggregated and treated as if they were employed by a single employer.
2. Doctor Jones, is incorporated as a Professional Corporation (PC) and owns 20% of the stock in ABC Surgical Group. There are 4 other shareholders in ABC Surgical Group owning an additional 20% each. Those other shareholders also own 100% of their own PC’s. ABC Surgical provides services to each of the PC’s. The PC’s are considered an FSO when it applies to ABC Surgical which is a B-org. All these share the same FSO and are therefore considered as one affiliated service group.
3. ABC Corporation both provides management functions to and receives more than 50% of its revenue from XYZ, Inc. The performance of these management functions or services satisfies the requirements of a principal business on a regular basis. Therefore the 2 organizations are treated as a management group.
Common questions to be asked in the determination of affiliated service group:
- Are all companies a service organization OR is at least one a service organization or professional service corporation receiving services from another organization OR associated in the performance of services for a third party?
- If #1 is no, does the company provide management functions to another company? If yes, what percentage of revenue is generated from the performance of this management function? (Must be More than 50%?)
- If #1 and #2 are both no, then STOP. No ASG exists.
- If #1 is yes, what percentage of gross receipts is attributed to providing services to another company? (5%, 10% or more?)
- What is the common ownership between the companies? If there is no common ownership, no ASG exists.