Control group with tax-exempt subsidiary

[Guest JDL]

Does anyone know if a for-profit parent that has a 501©(3) (tax-exempt) subsidiary can allow the employees of the tax-exempt sub. to participate in the parent's plans (i.e., 401k plan)? I would imagine this would depend upon where they would be considered to be in the same controlled group, however I'm not sure how that would be determined in relationship to the tax-exempt subsidiary. I'm not having luck finding an answer. Any suggestions? Thank you.

[jpod]

I cannot imagine any scenario in which a for-profit entity could be the "parent" to a tax-exempt entity. If you have such a scenario, please tell me more!

Perhaps you stated it backwards; many tax-exempts have for-profit subsidiaries. In those cases, clearly they are members of a controlled group of corporations or trades or businesses under common control. I don't know of any legal reason why the two groups of employees could not participate in the same plan.

[Guest JDL]

To provide more facts, the parent is a for profit corp and the sub. currently is a for-profit entity as well. However, there is talks of the sub. becoming a 501©(3) tax-exempt foundation. The employees of the sub currently do participate in the parent's plans, but I don't know how that would be treated if the sub does in fact convert to a tax-exempt foundation.

[jpod]

Well then, that is a horse of a different color.

I doubt that the sub could become non-profit and still be a "sub" of the parent. I think it's beyond the scope of this message board to speculate as to exactly how the total transaction would be structured, but ultimately the sub and the parent will be divorced and will no longer be members of a controlled group of corporations or a group of trades or businesses under common control. Also, I'll assume for the sake of argument that they won't be members of an affiliated service group either.

The employees of both entities could continue to participate in the same plan, but then it would become a multiple employer plan, subject to the few special rules applicable to such plans, including separate ADP and ACP testing.

[Guest JDL]

Thank you for the timely response! It does look like the foundation would no longer be a "sub" of the "parent" upon conversion to tax-exempt entity. However, I was looking at an old GCM (39616) which deals with whether a group of nonprofits could be considered under common control for purposes of 414© and the memo concludes:

"Thus, for purposes of Reg. 11.414©-2, an entity has a "controlling interest" in a nonstock nonprofit corporation if at least 80 percent of the directors or trustees of such organization are either representatives of or directly controlled by such entity. A trustee or director is a representative of the controlling entity if he is a trustee, director, agent or employee of such entity. A trustee or director is controlled by the controlling entity if such entity has the power to remove such trustee or director and designate a new trustee or director."

Of course, this GCM dealt specifically with a group of nonprofits, but it appears to me that it could also be used in the context of a for profit and a non-profit, provided the for profit meet the 80% control test.

Would this change your opinion? Thank you once again for your advice.

[jpod]

The GCM is just plain wrong.

Some would say, however, that whether it is wrong or not, a taxpayer or employer should feel free to rely on the GCM if it is to its advantage to do so. I disagree.

[E as in ERISA]

The IRS doesn't want entity structure to be used to get around the discrimination rules. Accordingly, you are likely to draw scrutiny from the IRS if the same decisionmakers are determining the benefits for both entities, you put all the HCEs in one of the entities, and the decisionmakers give that entity much better benefits. Upon audit, the IRS would be likely to assert that the rules of that GCM apply. You are much less likely to be scrutinized if the benefits for both are similar and/or there are more HCEs in the entity with the worst benefits.

One option is to consider putting all the employees in the taxable entity, and then having their time "donated" to the foundation.

Alternatively, you can make sure that the "control" rules of the GCM are "violated." E.g., make sure that the board of the foundation and its employees, if any, consist of persons who wouldn't create "controlled group" issues under the corporate rules -- e.g., possibly adult children or non-lineal relatives like aunts and uncles or cousins, etc.. (Of course you would want to make sure that they are like minded about contributions, etc.). Then you know that the IRS can't assert they are in a controlled group.

[Guest hpaine]

Take a look at this thread. I came across a similiar situation and from the research that I've done, what determines the ownership structure is how they file their corporate tax return. Hope this will help!

http://benefitslink.com/boards/index.php?showtopic=18511

[mbozek]

The controlled group rules of IRC 414(B) and © apply to non profits as well. Thus a NP that owns 100% of the stock of a for profit corporation is part of a cg with the business. The GCM and related PLR which allow aggregation of 2 np based upon common board membership were issued to permit a single 5500 filing. There is no basis in the regs for aggregating nps based upon board membership. Under the 414(B) regs a corp cannot be part of a cg with a np if the np does not have any stock/equity ownership which is owned by the corp. Since a GCM is not precedent (it is merely a legal opinion which must be adopted by the IRS to be binding) I dont think the IRS could use it in an audit to determine CG status. The IRS position is that CG status is to be determined solely under the 414(B)/© regs.

[Guest JDL]

Thank you all for replies. Your advice has been very helpful.