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Discrimination Testing for Employees of Entities Owned by Investment Funds


ERISA1

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Hi - I am wondering whether the employees of entities owned by a fund; e.g., a Mutual Fund, must be aggregated with employees of the Fund's management company. It seems there should be an exemption but I am not aware of any.

Facts: An investment fund (the "Fund") obtains its employees from a Management Firm. Ownership of the Fund and Management companies is not sufficient to make them a controlled group; however, they are likely an Affiliated Service Group.

The management firm sponsors a qualified plan covering its own employees.

The Fund owns 100% of several companies that offer retirement benefits with much lower contributions/benefits than those of the management org’s plan.

Some of the companies owned by the Fund are held as passive investments only ("Passive" entities). Other companies are actively managed by a small group of employees of the management company ("Managed Entities").

Issues:

1. Must employees of the Passive entities be included in coverage/discrimination testing of the Management Org’s plan?

2. Same question as above with respect to employees of the Managed Entities.

Proposed Answers:

1. The passive entities need not be counted in discrimination testing because:
a. They are not part of a controlled group with the Management Company
b. They do not render or receive services to/from the Management Company.

2. The managed entities need not be counted in discrimination test because:
a. They are not part of a controlled group with the Management Company; and
b. Whatever compensation they pay for service from employees of the Management Company will represent an insubstantial portion of gross revenues of the Management Company

Additional Thoughts: I believe there are clear rulings in the area of Prohibited Transactions providing that passive investments are not treated as prohibited parties. I would think a similar exemption should apply to entities that are primarily owned as investments, even if they get some services from employees of the investment fund.

Thanks very much for your feedback.

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