Affiliated Service Group Issue

[Guest JeffDixon]

Has anyone ever dealt with either of these issues?

A hospital has an ambulatory surgery center where surgery is performed on an outpatient basis by area doctors. The Hospital and area doctors formed an LLC that administers the surgery center using employees that are leased from the Hospital. The LLC has no retirement plan. All leased employees working at the center are paid by the Hospital and are fully covered by Hospital benefits including coverage in the Hospital's defined benefit plan.

The doctors each own individually a small percentage of the LLC (about 5% each), and each derive revenue from performing surgery at the center. In some cases the revenue that each doctor derives is a substantial percentage of their total revenue from practicing medicine (percentages range from about 3% to about 40%). The doctors themselves each own small some or all of a small business that practices medicine and most of them sponsor qualified retirement plans. Their plans would be disqualified if an affiliated service group were found to exist with the Hospital because they could not afford to cover 70% of the Hospital's 1000+ employees.

1. The Hospital keeps telling me that these arrangements are "all over the country" and that I am the first person to assert that an affiliated service group might exist. So I'm asking, have others of you dealt with this scenario? If so, what arguments did you make that no ASG existed?

2. A related question. Has anyone ever gotten a determination letter dealing only with the ASG issue? The IRS reviewer tells me that they will not rule on whether or not an ASG exists, but only whether the Plan would be qualified if it does. I can understand his reading of Notice 2002-6, but it seems to me that it renders the ASG determination process meaningless. Has anyone else dealt with this? What was the outcome?

[E as in ERISA]

What type of ASG are you thinking this is: A, B or management-type?

Can I confirm that you are saying that the doctors themselves own the interests in the LLC, not their practices? And their practices are completely separate from their LLC activities?

Off the top of my head, I'm thinking that the relationship between the doctors' practices and the hospital is too remote -- from the facts you give there is no overlap there. I think that I would be more concerned if there was a plan at the LLC level.

[Guest JeffDixon]

It could be either a Type A or a Type B in some situations. I agree that since the LLC has no Plan there is no one harmed, and that is our position. It seems that the service should hold that this is not the type of arrangement where an ASG is appropriate, but so far that is not the case.

[Guest JeffDixon]

Sorry, I forgot to post the answer to your other question.

Can I confirm that you are saying that the doctors themselves own the interests in the LLC, not their practices? And their practices are completely separate from their LLC activities?

Yes. The ownership interests are as individuals. However the surgeries performed are a part of their practice of medicine. The doctor's practices bill for the services.

P.S. I have to log out for a couple of hours, but will check back then.

[KJohnson]

Jeff, you can send me a private message and we can discuss this. However, I think deemed/attributed ownership for A Org status might be the key.

I think that if the medical practices are all C Corps and that no doctor has more than a 50% ownership in the C Corp then you may be o.k. In such a situation it would appear that the ambulatory surgical center (ASC) could be deemed to own all or a portion of each medical practice but the medical practices would not be deemed to own any of the ASC. Therefore under the affiliated service group rules, the ASC could be an A-ORG to the medical practices FSOs but the medical practices would not be considered A-ORGs to the ASC’s FSO. All A-ORGS to the same FSO are aggregated. The hospital would presumably not be an AORG or BORG to the medical practices (presuming that no Doctor has an ownership interest in the hospital itself) so that there would be no requirement to aggregate the hospital and the medical practices.

There would however, be an obligation to aggregate each medical practice with any employees of the ASC. The ASC may not have any employees but you run the risk of having the hospital employees be the leased employees of the ASC. It seems the key is to avoiding problems here may be to use the revised definition of leased employee. A leased employee used to be individuals who, among other things “performed services of the type historically performed in the business field” of the recipient employer. Because of this, even if the ASC leased all of its employees from the hosptial those employees could still be considered employed by the ASC. However, the definition of leased employees in 414(n) was revised to drop the “historically performed” test and replace it with a “primary direction and control” test. Therefore, if the employees remain under the “primary direction and control” of the hospital and the ASC does not have “primary direction and control” the “leased” employees will not be considered employees of the ASC.

Thus, although the ASC and each medical practice will have to be aggregated, there will be no “employees” to aggregate in the ASC.

Huh?

Ken

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What's the frequency Kenneth? --REM

[Guest JeffDixon]

Thanks Ken:

Your analysis is very good. We had contemplated the leased employee issue and reached the same conclusion.

One other relevant point is that the Hospital owns more than 80% of the LLC, and is thus in a control group with the LLC. Thus, if the ASC is an FSO with any of the doctor's P.A.'s, then that P.A. is in an ASG with the Hospital. Wow! alphabet soup!

I need your e-mail address to discuss this further. Please e-mail me at jeff_h_dixon@hotmail.com so I'll have your address.

[E as in ERISA]

An 80% interest by the hospital changes the analysis.

But is the LLC treated as a partnership or corporation for tax purposes?

[KJohnson]

I agree that the controlled group between the hospital and the ASC changes the analysis.

In situations such as these I have wondered about the "too remote" analysis because all of the billing for the doctor's services at the ASC are almost always run through the P.A. Thus, since the P.A. is billing for the services (or receiving payment for the services from the ASC), it is hard to say that the P.A. and the ASC are not "regularly associated in performing services for third persons".

[KJohnson]

By the way, here is a link where Derrin Watson goes over the attribution rules in a similar context.

http://www.benefitslink.com/cgi-bin/qa.cgi...d=134&mode=read

As an aside, I don't know the guy but I sure do use his book when this stuff comes up.

[Guest JeffDixon]

Thanks to both of you for the ideas. I'll pull all of these together and use them. If anyone thinks of anything else. I'll be checking here from time to time.

BTW, Derrin Watson is very good at his analysis. I saw him at a Corbel seminar in Boston last year. Not only is his analysis good, but his presentation is HILARIOUS!! I highly recommend checking out one of his programs if the opportunity presents itself.

Jeff