Definition of Affiliated Service Group

[Guest aincog]

What is considered an Affiliated Service Group for retirement plan issues.

[Effen]

TREATISE, PENSION-ANSWER-BOOK, Q 5:35 What is an affiliated service group?

An affiliated service group consists of a service organization (FSO) and one or both of the following:

1. A service organization (A-ORG) that is a shareholder or partner in the FSO and that either regularly performs services for the FSO or is regularly associated with the FSO in performing services for third persons.

2. Any other organization (B-ORG) if a significant portion of the business of the B-ORG is the performance of services for the FSO or the A-ORG (or for both) of a type historically performed in the service field of the FSO or the A-ORG by employees and 10 percent or more of the interests in the B-ORG is held by individuals who are HCEs (see Q 3:2) of the FSO or A-ORG.

[i.R.C. §414(m); Rev. Rul. 81-105, 1981-1 C.B. 256]

Example.

Medical partnership P consists of corporate partners A, B, and C. Each partner owns one-third of the partnership. The partnership employs nurses and clerical employees. Corporations A, B, and C have only one employee each, the respective shareholders. The partnership does not maintain a retirement plan. Corporations A, B, and C maintain separate retirement plans.

Partnership P may be designated as the FSO. Since corporations A, B, and C are partners in the FSO and regularly perform services for the FSO, corporations A, B, and C are A-ORGs. Because corporations A, B, and C are A-ORGs for the same FSO, corporations A, B, and C and the FSO constitute an affiliated service group. Consequently, all the employees of corporations A, B, and C and the employees of P are considered as employed by a single employer for purposes of testing the qualification of the three separate retirement plans maintained by corporations A, B, and C.

IRS had issued proposed regulations directed at determining what types of organizational structures would be disregarded in order to prevent the avoidance of employee benefit requirements. These regulations covered affiliated service groups, leased employees (see Q 5:58), and other organizational arrangements. However, in 1993, as part of the Regulatory Burden Reduction Initiative, IRS withdrew those proposed regulations because IRS did not plan to finalize them. [T.D. 8474]

One court ruled that an individual who was employed by a corporation that was a member of an affiliated service group was not entitled to participate in a qualified retirement plan adopted by another member of the group because his employer had not adopted the plan. [Lopriore v. Raleigh Cardiovascular & Thoracic, Inc., 2002 WL 199517 (4thCir. 2002)] Where a corporation (Newco) was formed by the merger of six corporations (Oldcos), the plan adopted by Newco did not have to be aggregated with any plans of the Oldcos because the entities did not constitute an affiliated service group. [Priv. Ltr. Rul. 9541041]

Affiliated service group status under the Code does not, in and of itself, support a conclusion that a group of two or more trades or businesses is a single employer for purposes of determining if an arrangement is an ERISA multiple employer welfare arrangement because of differences in the definitions. [ERISA §3(40); DOL Info. Ltr. (May 24, 2004)]

[Belgarath]

And just to further muddy the waters, don't forget about "management function" affiliated service groups. See IRC 414(m)(5). These do NOT require cross ownership in any form, and neither group needs to be a "service organization."