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Controlled Group/Affiliated Service Group Question


Gadgetfreak

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I have reviewed the regulations so many times I am afraid I am missing something. To me, it seems that there are 4 possible ways two companies can/should be combined (absent a MEP, PEP, etc.):

1) Controlled Group with Common Ownership

2) ASG as A-org (requires common ownership - albeit only a very small amount)

3) ASG as B-org (requires common ownership - albeit only a very small amount)

4) Management Group (does NOT require common ownership)

 

If my understanding is correct, then only #4 requires common ownership of any kind. With that said, I am pretty sure this hypothetical situation isn't allowed but I don't know why:

I am a TPA owner with 15 employees and a DC (401k/PS plan with 3% SHNE). I decide to open a new business that my best friend (not related) will own but not take a salary. I will move all the 15 employees to that company and they will perform the TPA services. That company will pay me a consulting fee. I will open a solo401k for my consulting company and get away with excluding all my employees from the plan. There is no common ownership and one company isn't doing management for the other. 

What am I missing? And is there a specific definition of what it means to provide management services?

Thanks in advance.

ERPA, QPA, QKA

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49 minutes ago, Gadgetfreak said:

What am I missing? And is there a specific definition of what it means to provide management services?

As you are aware, which is why you are asking the question, the form of your transaction reeks of abuse of the very type the 414 rules were designed to prevent: From the IRS' point of view, you moved the employees to another "unrelated" company (not for any legitimate business reason), but just so that you could open up a solo 401(k) for yourself (and exclude them).  So, if I were the IRS, I would look closely at the 1.414(m) Treasury Regulations where they define a "management organization" based on its principal business (more on this later) of providing management functions (very broadly defined and includes consulting) to the recipient organization.  So you think that your "principal business" is not to provide management functions to the recipient organization? Think again, because the Commissioner (i.e., the IRS) has the sole discretion to use the catch-all "facts and circumstances" analysis to conclude that your "principal business" is providing management services to the recipient organization. Therefore, you would be a single employer under 414(m).  Unfortunately, if the IRS were to make such a determination, and you decided to sue, the court will review the IRS decision with a great deal of deference. It's standard of review would be "arbitrary and capricious."  The tax-code in the area of retirement plans is a series of anti-abuse provisions. Anti-abuse provisions almost always provide for catch-all determinations because they know that not all circumstances of potential abuse can be codified in the statute or the regulations.  

 

 

 

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Thank you for your detailed response (and especially your acknowledgement that this is completely hypothetical and I would never think of actually doing this :)). So this would be pretty clear that we use common sense and not allow this as anything other than an ASG. Now my real situation isn't so clear cut. I have medical practice client A and a separate doctor is starting an offshoot of that practice called B. There is absolutely no common ownership. Work by A is not yielding revenue to B nor vice versa. However, B will pay rent to A to use one of their lab machines and for office rent.

In this situation, A and B actually WANT to be part of the same plan with the same BRF. My only question is are they an ASG or does this need to run as a multiple employer plan with one 5500 but separate testing?

Thanks again.

ERPA, QPA, QKA

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On 12/30/2020 at 11:33 AM, Gadgetfreak said:

Thank you for your detailed response (and especially your acknowledgement that this is completely hypothetical and I would never think of actually doing this :)). So this would be pretty clear that we use common sense and not allow this as anything other than an ASG. Now my real situation isn't so clear cut. I have medical practice client A and a separate doctor is starting an offshoot of that practice called B. There is absolutely no common ownership. Work by A is not yielding revenue to B nor vice versa. However, B will pay rent to A to use one of their lab machines and for office rent.

In this situation, A and B actually WANT to be part of the same plan with the same BRF. My only question is are they an ASG or does this need to run as a multiple employer plan with one 5500 but separate testing?

Thanks again.

I do not see common control under Section 414 on the above facts, assuming:

1. A and B do not have any sort of familial relationship;

2. Neither A nor B perform "management functions" to the other entity--paying rent and "using" a lab machine are not management functions; and 

3. Neither A nor B are owned (or own) directly or indirectly any other entity that you are not describing above. 

They would be separate employers, and as you point out, the plan would be a MEP. 

 

 

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