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Just to make sure I haven't gone nuts...

4 different companies, A, B, C, D. Let's say we are a TPA for company A.

Ownership is such that A, B, and C are part of the same controlled group. D is part of a controlled group with A, but not with B and C.

For purposes of administration on A, all three (B, C, and D) are considered part of the controlled group with A, right? This seems like a very basic question, but I'm suddenly doubting myself...

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I'm pretty sure that you cannot have a single CG simply by having a common member. The group as a whole A/B/C/D does not satisfy the CG test. Instead, what you have are 2 CGs, A/B/C and A/D. If you are doing admin for A, you would need to look at both A/B/C and A/D for any CG issues.

 

 

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I am not sure this works unless you consider all four groups as a controlled group.

A/D - controlled group

A/B/C - controlled group

ERGO

(A/D)/B/C - controlled group

This is true for qualified plan purposes.

I'm pretty sure that you cannot have a single CG simply by having a common member. The group as a whole A/B/C/D does not satisfy the CG test. Instead, what you have are 2 CGs, A/B/C and A/D. If you are doing admin for A, you would need to look at both A/B/C and A/D for any CG issues.

This illustrates one of the major differences between being part of a controlled group for income tax purposes and being part of a controlled group for qualified plan purposes. For qualified plan purpose, it's exactly the way actuarysmith illustrated. For income tax purposes, your logic seems correct; except that A could get to choose whether to file with "B/C" or "D".

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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Would you mind explaining what part of the regs make you reach that conclusion? I'm not trying to be argumentative, I'm genuinely interested in seeing the application and solution.

From Sal's ERISA Outline Book

Overlapping controlled groups.

Suppose there are two controlled groups that have a common member. Should that result in the aggregation of the two groups as a singlecontrolled group, even though the ownership in all of the companies taken together could not satisfy the controlled group test?

A and B constitute a brother-sister group and B and C constitute a brother-sister group. However, the three corporations together do not satisfy the brother-sister test because Dan is the only common owner of all three corporations, and he owns less than 80% of C. We would argue that A, B and C are not combined into a single controlled group merely because Corporation B is a common member of the two groups. When applying the qualification requirements described in Part D. of this definition, Corporation A takes into Controlled Group AB, Corporation C takes into account Controlled Group BC, but Corporation B must make sure these requirements are satisfied by taking into account Controlled Group AB and then by taking into account Controlled Group BC. We base this argument on the following: (1) IRC §1563(a)(3) (see 3. above) would be rendered superfluous if all groups with overlapping members were automatically combined, (2) to combine the companies merely because of an overlapping member would contradict the Supreme Court’s “common owner” interpretation in the Vogel Fertilizer case since Dan is the only common owner of all three corporations, and (3) informal statements made by the IRS at various employee benefit conferences.

Thanks.

J

 

 

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That is a fair request. This is something that I researched years ago and held that position since then. I can retrace my research to determine why I came to that conclusion. This will take a little time.

Again, it is a perfectly fair request. When you take a position, you explain why it is you have that position. Right now, all I have is that I confronted it years ago and held this conclusion based on research I did back then.

It's only reasonable that I should be able to research it again and either defend that conclusion or determine what I may have missed.

To be continued...

CPC, QPA, QKA, TGPC, ERPA

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Okay, it was actually from a position that Derrin Watson took in his book "Who is the Employer". He explained a case he worked on when the IRS threatened an adverse letter. The case given was where:

X was in the controlled group with Y

Y was in a controlled group with Z

X was not (directly) in a controlled group with Z.

In the issue he presented, Z had more employees than X and Y put together. X had a provision that automatically brought in members of the controlled group. So, when the IRS took the position that Z was a part of the group with X & Y, they ended up redoing the allocations for several prior years in order to bring Z's employee into the plan.

Regardless of which school of thought you subscribe, it appears as if the IRS can arbitrarily choose to disagree depending on the facts of the case. Since my research, I chose this method because if Y is a controlled group with Z, then by definition Y is equal to XY (because they are treated as a single employer for controlled group purposes). There does not appear to be any rejection of that logic.

NOW, not to change the subject, but if we look at the attribution rules of Section 318, there is actually language the rejects double attribution. [i'm just using this to illustrate my thought pattern]. If I own what my father owns, and my father owns what my sibling owns, then that DOES NOT mean that I own what my sibling owns; because there is a plain language rule against double attribution.

The controlled group rules, to me, do not appear to do that. But, you did state your position on the Vogel Fertilizer case and "Informal" positions taken by the IRS. I'm still not on that because these are, at best, arguments where there is no clear precedent.

{There are very few items in this industry where I remain on the fence with an issue. This will likely continue to be one of them}

Good Luck

CPC, QPA, QKA, TGPC, ERPA

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Thank you for that explanation. Derrin was going to be my next stop in researching this issue so I can definitely see the merits of your argument. It should be noted that my second post was quoted from the current edition of Sal Tripodi's ERISA Outline Book, so I cannot take credit for the IRC §1563(a)(3) interpretation, the position on the SCOTUS holding in the Vogel Fertilizer case, or the informal positions taken by the IRS at industry conferences. I will say that I am a bit surprised to see Derrin and Sal take come to such opposite positions on the matter.

I can certainly see merit in your argument that they should be treated as a single employer. I think reasonable people can agree to disagree on this issue as there is logic to both positions.

I did go back and read Derrins thoughts on the issue in Who is the Employer, and I found his short answer very interesting

Under Derrin's reading of the Code, §414(b) would cause all members of the overlapping groups to be treated as a single employer because... (http://benefitslink.com/m/qa.cgi?n=31&db=qa_who_is_employer)

Question 31: Employer A and Employer B are a controlled group. Employer C is not part of the controlled group. Employer C is part of an affiliated service group with Employer B. Employer A is not part of an affiliated service group. For qualified plan purposes, are employees from A,B and C considered to be employed by the same employer? Or are the groups considered separately for testing and other qualified plan purposes (i.e., A and B are tested together, and B and C are tested together, but A,B and C are not tested together)?

Answer: It depends on who you listen to, the Code or the IRS!

IRC §414(b) provides that for most qualified plan purposes, all employees of corporations that are part of a controlled group (whether or not they are component members of that group) are deemed to be employed by a single employer. Logically, this means that when you have overlapping groups, you end up with what amounts to one big group for qualified plan purposes. This is illustrated by the following example.

Three Corporations, Two Groups, One Employer. Corporations X and Y are members of a controlled group. Y and Z are members of a different controlled group. For income tax purposes, Y has filed an election to be treated as part of the group with X and not with Z. That election is ignored for qualified plan purposes.

All employees of X and Y are deemed to be employed by a single employer for plan purposes. All employees of Y and Z are deemed to be employed by a single employer. By the normal rules of logic, this means that all employees of X, Y, and Z are employed by a single employer.


Think of it this way. Suppose X wishes to sponsor a plan covering all its employees as defined in the Internal Revenue Code. Who are its employees? Because of IRC §414(b), its employees are everyone on its payroll and everyone who is an employee of Y. Who are the employees of Y? Because of IRC §414(b), the employees of Y include everyone on its payroll, all employees of X, and all employees of Z. Hence, if X sponsors a plan covering all its employees, it brings in the employees of Y and Z automatically.

Derrin also brings up a case from the 1970's where the IRS threatened an adverse letter.

Two very different outcomes from two very reliable sources in our industry.

To further complicate things, I think I will see if I can get this question submitted for the IRS Q&A at ASPPA Annual. I know it is only the opinion of the presenter, but it would be interesting to see where the IRS are on this in 2016.

Cheers!

J

 

 

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  • 1 year later...

@Belgarath @ETA Consulting LLC @actuarysmith @Bill Presson

I submitted this question for this years ASPPA Annual "ask the experts" panel discussion.

Sal Tripodi maintained his position that it should be tested as separate controlled groups for the reasons outlined above.  Another panelist pointed out Derrin's position and that there is no real consensus on this issue and that there is no direct guidance. 

It was also mentioned that when discussing the issue with the IRS for a prior year IRS Q&A, the IRS answer was that either approach "would not be an unreasonable interpretation".

 

 

 

 

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2 hours ago, RatherBeGolfing said:

@Belgarath @ETA Consulting LLC @actuarysmith @Bill Presson

I submitted this question for this years ASPPA Annual "ask the experts" panel discussion.

Sal Tripodi maintained his position that it should be tested as separate controlled groups for the reasons outlined above.  Another panelist pointed out Derrin's position and that there is no real consensus on this issue and that there is no direct guidance. 

It was also mentioned that when discussing the issue with the IRS for a prior year IRS Q&A, the IRS answer was that either approach "would not be an unreasonable interpretation".

Thank you for having the presence of mind to follow up on this.  This helps.  It's clear the IRS is going to maintain the flexibility to take the tact opposite of the most favorable outcome.  Whether or not they operate like this (void of any consistency) is another thing, but it certainly keeps our hands tied as we try to consult with our clients.

Thanks again!

CPC, QPA, QKA, TGPC, ERPA

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4 hours ago, ETA Consulting LLC said:

Thank you for having the presence of mind to follow up on this.  This helps.  It's clear the IRS is going to maintain the flexibility to take the tact opposite of the most favorable outcome.  Whether or not they operate like this (void of any consistency) is another thing, but it certainly keeps our hands tied as we try to consult with our clients.

Thanks again!

Just remember that the IRS response is always deemed to not be a resource AND it wasn't said at this conference. Adam Pozek remembered it from a few years ago. But if your plan ever gets in trouble, Sal or Ms Ilene or Ms Kelsey are available for hire to help get them out.

:)

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070

 

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15 hours ago, Bill Presson said:

 But if your plan ever gets in trouble

Thanks for the insight.  But, this is, exactly, what we're trying to avoid so that we don't have to hire attorneys.  Not being argumentative, but you wouldn't want to hire an actuary to confirm that 2 plus 2 is 4. Heck, I can provide this information to my clients for free :-)   Situations such as this, where there is seemingly an intentional refusal to offer concrete guidance, handicaps us from providing our clients the accurate and complete information they seek.  If the IRS gives us the guidance, then we can avoid trouble; which is often my focus.

But, thanks for the insight.  Again, I'm not being argumentative, but merely voicing frustration on what appears to amount to a lack of initiative from the IRS.  

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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2 hours ago, ETA Consulting LLC said:

Thanks for the insight.  But, this is, exactly, what we're trying to avoid so that we don't have to hire attorneys.  Not being argumentative, but you wouldn't want to hire an actuary to confirm that 2 plus 2 is 4. Heck, I can provide this information to my clients for free :-)   Situations such as this, where there is seemingly an intentional refusal to offer concrete guidance, handicaps us from providing our clients the accurate and complete information they seek.  If the IRS gives us the guidance, then we can avoid trouble; which is often my focus.

But, thanks for the insight.  Again, I'm not being argumentative, but merely voicing frustration on what appears to amount to a lack of initiative from the IRS.  

Good Luck!

I completely agree. I've been on the ASPPA conference committee for 4 years now and will serve as a co-chair for the next 2 years before rotating off. The lack of cooperation from government the last several years has been incredibly frustrating.

People are fine with following the rules to get the benefits. But we need to know what the rules are.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070

 

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