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Affiliated Service Group leased employee coverage


Guest Katharine Jungkind
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Guest Katharine Jungkind

Several sole proprietors/service corporations-FSOs- (some of which have their own employees) own interests (greater than 10%) in single LLC which acts as a phone service for the FSOs. Appear to have affiliated service group between each FSO and the management company, but no cross ownership between the FSOs, so based on preamble to proposed regs "Two or more affiliated service groups will not be aggregated simply because an organization is an A Organization or a B Organization with respect to each affiliated service group." Each FSO has its own SEP and makes contributions. Management company has one employee who is a leased employee and participates in a 401k plan through the leasing organization (but plan doesn't appear to satisfy the requirements for employee not to be covered by lessee organization). Since apparently each FSO-group should technically cover the leased employee, how can this be done?

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The shared employee regulations which dealt with this situation provided a solution, but they were withdrawn.

To the extent that the employee is a "leased employee" IRC section 414(n)(5) offers a safe harbor solution; however, if the employee is deemed to be an employee of an affiliated service group member, the employee is entitled to be covered under a plan which is comparable to the best plan adopted by any of the other entities forming an affiliated service group with the service org.

The solution: Have someone else unrelated to the FSOs own the entity.

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Note that even if you can "Have someone else unrelated to the FSOs own the entity" you will still have the "leased employee" problem and as vebaguru points out "if the employee is deemed to be an employee of an affiliated service group member, the employee is entitled to be covered under a plan which is comparable to the best plan adopted by any of the other entities forming an affiliated service group with the service org.".

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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