Management Company/Affiliated Service Group Rules

[Guest Michael J. Sievert, CFP]

In addition to the rights and features disparity question . . Corp. A is an accts. rec./billing office for the physicians in Corp B. Between 1/93 and 12/98, the 30 physicians in Corp B had equal ownership in Corp A (each physician had 300 shares). The legal counsel for both corporations deemed them to be Afilliated Service Groups during this period. Therefore, during the period above, Corp A and B shared the pension/profit sharing plan and medical reimbursement plan.

During the period of 1/99 to the present, their legal counsel recommended that the physicians divest their ownership from Corp A in order for B to set up their own pension plan, medical reimbursement plan, and relieve them of making any more contributions to the employees of A. Each physician then relinquished their 300 shares to the president of corp A. A legal opinion was issued. Any input?

Background: Corp A and Corp B are located in the same office. 99% of Corp A's business is performed for B. Corp A answers the phones for the physicians in B. The president of A performs payroll and accounting duties for the physicians of B. The secretary for the physicians is an employee of A. Corp A charges a % of Accts. Rec. created by Corp B.

[This message has been edited by Michael J. Sievert, CFP (edited 09-23-1999).]

[Guest David Dye]

Although you didn't specify ownership percentages, it sounds like Corp. A and Corp. B have been both a controlled group of corporations (brother-sister group) as well as an affiliated service group. Now that the physicians of Corp. B have divested their ownership in Corp. A, the controlled group situation may no longer apply; however, the affiliated service group situation does still exist. (By the way, if the physicians of Corp. B no longer own Corp. A, who does own Corp. A?).

The term "affiliated service group" includes a group consisting of (1) an organization the principal business of which is performing, on a regular and continuing basis, management functions for another organization, and (2) the organization for which the functions are performed.

IRC § 414(m)(5)

Given the background info you provided, I would say that Corp. A fits the definition of organization (1) and Corp. B fits the definition of organization (2).

The performance of services for Corp. B will be assumed to constitute a significant portion of Corp. A's business if 10% or more of Corp. A's total gross receipts FROM ALL SOURCES during the current year, or two preceding years, was derived from performing services for Corp. B. It will be assumed that the performance of services for Corp. B is NOT a significant portion of Corp. A's business if less than 5% of Corp. A's gross receipts DERIVED FROM PERFORMING SERVICES during the current year AND two preceding years was derived from performing services for Corp. B.

Prop. Reg. § 1.414(m)-2©(2)

Before Corp. B continues with its own plan contributions to the exclusion of Corp. A employees, I would have Corp. B's legal opinion given some further review.

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W. David Dye, APA

FLEXBENEFIT Consultants, Inc.

Columbia, SC

wdavid.dye@gte.net