Controlled Group 403(b) coverage

[Effen]

I am not very familiar with the rules related to 403(b) plans but I recently had a hospital client ask us to prepare 5500s for their 403(b) plans. During our discussion, he laid out the following:

They currently have 4 wholly owned subsidiaries. Three of the four have 403(b) plans. Two of those three 403(b) s are exactly alike, but all are under different contracts w/ TIA CREFF. They have been filing separate 5500s. Each of the three contain both employer and employee contributions.

It seems to me that they might have a problem under 403(b)(12)(A) since the 403(b) is not available to one of their subs. Do they have to offer the same plan to each of their subs? Apparently TIA told them they had to have separate plans, but he wasn't sure why. Also, do they need to test the employer contribution under 401(a)(4) or 410(b)?

Any guidance would be appreciated. I just want to be able to alert them that they may have a problem, before I potentially become party to their problem.

[E as in ERISA]

What types of organizations are these and what type of ownership?

I'm assuming the hospital is a 501©(3) tax exempt organization and so are the "subsidiaires" -- in order to actually be eligible employers?

A "wholly owned subsidiary" would more likely be a "wholly controlled subsidiary" in the tax exempt context. There wouldn't generally be stock ownership. There would be control -- e.g., the ability to appoint the board of the subsidiary, etc.

The rules for common control/controlled group are not as clear in this context. There is some indication from the IRS regarding how they think that the rules would apply -- mostly based on the voting power concept -- and applying that to the ability to control through appointment of the board, etc. But I don't think that the law is clear.

[Effen]

I just received some additional information.... apparently the four entities are 501©(3) tax-exempt organizations, but there is also a "for profit" entity that has no employees. That makes 5 organizations under one "parent", the four w/ employees are 501©(3) tax exempt and one, w/out employees, is not.

[E as in ERISA]

So I'm assuming that there is no stock? So why are they considered "wholly owned"? Do you mean "wholly controlled"? And what are the specific facts?

[E as in ERISA]

See http://www.kglawpgh.com/subsearch/publicat...sfj_dec1988.htm

It's old, but it provides some of the history of the IRS' position -- as well as arguments about why it may be questionable.

So they may have room to take either position.

[Effen]

"wholly owned" were my words. Most of my clients are corporations and I didn't really think about the nuances before I typed it. My understanding is there is no stock, except for one share due to the "for profit" entity.

Thank you for your help.

[Effen]

From the article....

There is no evidence that Congress intended to subject §501©(3) organizations to the aggregation rules of §414, either expressly or by implication. Despite efforts by the IRS, through a 1986 Private Letter Ruling and General Counsel’s Memorandum, to interpose a definition of “control” in a non-ownership situation, that position was not adopted in the final regulations issued under §414. The law, thus, still requires some degree of common ownership for purposes of the controlled group rules of §414(b) and © and for the affiliated service group rules of §414(m)(2).

So I guess the theory is that there can be no controlled group w/out stock ownership. No stock, no controlled group, no aggregation for 403(b).

why wouldn't the same arguement work for a 401(a) plan (DB, DC), or does it?

Thanks for the reference.

[E as in ERISA]

Here's another link:

http://benefitslink.com/perl/qa.cgi?db=qa_..._employer&id=19

It's a more recent article (1999) from the Who's the Employer column/book discussing the IRS' past position and disputing it to some extent.

The logic in these articles might be used to win on appeal.

But lots of taxpayers don't want to take an issue that far. The statute simply says that the organizations have to be under "common control." And it's possible for the IRS to assert that one organization is under "common control" with the other where the one's board appoints the other's board. They analyze control all the time for other purposes -- e.g., in terms of reporting compensation, transactions, and other information on the Form 990 -- and applying tax rules on the Form 990-T. And if they have established for those other purposes, then they may very well apply the same logic to the plans.

This is one of those situations where the client needs to decide whether they wants to be okay in an IRS exam or whether they are willing to take it to court and win the appeal. (And only an attorney can advise them on their probability of success in a court case -- that is practice of law...)

[mbozek]

Kathrine: IRC 414(b) and © are specificaly limited to controlled groups under IRC 1563 which is defined as interests in stock (b) or equity© (e.g., share pf profits or capital) by related parties. The regulations which were written by lawyers in the Treasury department (not the IRS) follow both the statute and the legislative history of ERISA in rejecting any non stock/equity realtionship as the basis for a controlled group of NP organizations. While the IRS has issued PLRs extending the controlled group rules to NPs which have common board interest, PLRs are statutorily limited to the taxpayer who requests it and cannot be applied by the IRS to any other taxpayer. The IRS has no authority for extending the holding in the PLRs to benefit plans of NP organziations who have not requested such a ruling regardless of what authority it has under other sections of the code to require aggregation. A taxpayer does not need to go to ct - just demand that the agent provide the statutory basis for aggregating the retirement plans in writing which the IRS is required to provide under the taxpayer's bill of rights.

[E as in ERISA]

? Only 414(b) references 1563.

[E as in ERISA]

Note that the IRS' 403(b) examination guidelines indicate that the employer would include any related employer under 414(b), ©, (m), (o).

http://www.irs.gov/pub/irs-tege/403b.pdf

The point is that regardless of what the legislative history, statute and regulations say, you could get an agent and supervisor who adamantly insist on aggregation -- and potentially tell you that 414© provides the statutory authority to do whatever they want -- because it is vague enough to support any conclusion....

[mbozek]

?? IRC 414© states that the regulations for unincorporated entities shall be similar to the principles for controlled groups of corporations under IRC 414(b). The regulations are based on rules in the House committee report for ERISA (93-807).

The reference in the 403(b) examination guidelines refers to the situation where a NP organization owns a profit making entity under the principles of the 414(b) or © regs, e.g. NP owns 80% of the stock of a profit making corporation or 80% of the profits of a partnership. It does not provide authority to exceed the scope of the regulations to aggregate plans.

If the agent goes beyond the scope of the regulations the client needs to retain a tax advisor who will explain the rules to the agent including the penalities for mis representing the application of the regulations (up to and including fines and dismissal of the agent as well as personal liability). Under the 1998 IRS reform Act agents and other IRS reprentatives can not ignore the rules. And the regs are not ambigious - they clearly define the entities that are subject to aggregation under the CG rules. The IRS has not issued any special rules for aggregation of retirement plans of NP entities because of the limitation of aggregation to the rules under IRC 414(b) and ©.