Affiliated Service Group Question

[Dougsbpc]

This has to be one of the most complicated areas of qualified plans.

Have an employer who may want to sponsor a defined benefit plan. Here are the facts:

Company A is a construction company with 30 employees. It is owned by Mike 47%, Bill 47% and two non-related others for a total of 6%.

Company B is in the business of estimating project costs. It is owned by Mike 25% and Bill 25% and an unrelated person 50%. It has 10 emloyees. The unrelated person has no ownership in company A.

Company B wishes to sponsor a DB plan but does not want to cover employees of company A.

It appears no controlled group exists.

The question is whether an affiliated service group exists.

Niether company will act as a management company for the other. It is true that Company B will do some estimating for company A but the majority of work will be done for other unrelated companies.

Capital is a material income producing factor for company A so it cannot be an FSO. Capital is not a material income producing factor for company B so it would be the FSO. In this case, company B would be the FSO and company A would be the B-org.

Our understanding is that a significant portion of the B-org must be the performance of services for the FSO for an affiliated service group to exist. No services would be performed for the FSO. However, a significant portion of the FSO's business is the performance of services for the B-org.

Do we need to consider this in both directions or is an affiliated service group only present when the B-org performs significant services for the FSO?

Thanks much.

[No Name]

I have no reference material in front of me, so take this with a grain of salt. I thought an FSO had to be a professional org (doctor, lawyer, architect, etc).

[JAY21]

I believe that's true if the FSO is a corporation (must be professional svc.).

[R. Butler]

The professional service corp. exception is applicable only to A-Orgs

Based on the facts given I don't see an ASG. Co. A is the potential FSO & its not a service organization.

[Dougsbpc]

Thanks for the replies.

Ultimately, we will have this employer seek an opinion from an ERISA atty. if they wish to go ahead, but in the meanwhile it would be good for us to get it staight.

R. Butler - could company B be an FSO? It would not be a professional corp, but my understanding is that you can have a service organization without being a professional organization. I read that the real test is whether services are performed for the public and whether capital is a material income producing factor.

[R. Butler]

We just came at it differently. Certainly Co. B could be an FSO, but as you point out there are no services being rendered to Co. B, so it can't be the FSO in this group.

I agree that here and in most ASG cases, it is wise to recommend the plan sponsor contact an ERISA Attorney.

[smm]

I am not going to attempt to analyze the facts and agree that the correct answer is to get an opinion from an ERISA attorney. However, what I will add to this discussion is that you must always do the ASG from both directions. An entity not be an FSO b/c or the corporation exception or some other exception but could be A-Org if the other entity is the FSO. Also, beware of the stock and ownership attribution rules. There is a Q/A "Whos the Employer" on benefits link. Many of the questions involve ASGs and are very helpful in analyzing fact patterns. Good luck