Affiliated Service Group

[12AX7]

I appreciate any help in determining if this situation is perhaps an Affiliated Service Group:

There are a group of 25 companies that engage in currency exchange. By state law, each location must be a separate business entity and that is why there are 25 separate busineses. 17 of the 25 are a controlled group. Of the 8 remaining businesses, 5 are owned 50/50 between a brother and sister, so this group of 5 is a controlled group, but not with the other 17. The remaining 3 businesses have ownership split 3 ways between brother/sister/other unrelated person.

Here's where it gets interesting. One of the company's sole purpose is a management facility that also does invoicing and payroll for the employees of all the other companies that do not want group health insurance. Another company's function is only to facilitate group health insurance. Therefore, anyone wanting group health insurance gets a paycheck from this company. Otherwise, an employee gets a paycheck from the management company.

Are the non-controlled group members perhaps an Affiliated Service Group? I appreciate any opinions on this.

[Ron Snyder]

Questions/Clarifications:

1. Is the "other unrelated person" for the other 3 corps the same person? If so, those are a controlled group. If not, the other 3 corps will be a controlled group if the bro/sis own >50% of the ownership in the corp.

2. Are both payroll corps in the same controlled group?

All employees who receive their payroll through either payroll service company are eligible for the plan(s) of the controlled group to which the payroll service company belongs unless such employees are specifically excluded from the plans. Even if specifically excluded from the plan(s), they are included for nondiscrimination testing purposes.

Note: Having 2 payroll companies may fool the health insurance company but does not affect the nondiscrimination testing for the health plans for tax purposes any more than it does for retirement plan purposes.

[12AX7]

The "other unrelated person" has no attribution through Section 1563. The brother and sister do own greater than 50% in the 3 companies, but less than 80%. No same people own 80% or more, so they are not a "brother-sister" controlled group. The two payroll companies are owned 100% by the same person so there is a controlled group with respect to the companies that provide the payroll services.

Is it safe to declare all employees members of a controlled group just because the companies that cut their paychecks are related members? Clearly, several of the 25 companies are not controlled group members. Their connection is through the management/payroll companies.

All the companies want to adopt the same plan whether it's a single employer plan (for controlled groups) or a multiple-employer plan, if necessary. The plan will be a basic Safe Harbor Match and all other provisons of the plan will the same for each adopting employer. In the end there should be no issues with coverage. I'm just having difficulty determining if the non-controlled group members are perhaps members of an Affiliated Service Group.

[Guest Pensions in Paradise]

The determination of controlled group status or affiliated service group status has important ramifications beyond coverage testing. You should retain qualified legal counsel.

[Belgarath]

I agree with PiP. Sounds like a potentially very complex determination.

One other very brief observation, which may make no difference whatsoever but COULD depending upon ownership: attribution for ASG is IRC 318 attribution, rather than 1563 attribution which you use for CG detrmination.

[Ron Snyder]

12AX7-

Under IRC 1563(a)(2)(b), all that is required for a controlled group is 5 or fewer shareholders (you have 3) which own >50% of the ownership of the entity to the extent that the overlapping ownership is identical. It appears to me that you necessarily have a controlled group for all entities.

Corp 1

Bro=40%, Sis=30%, Other=30%

Corp 2

Bro=30%, Sis=40%, Other=30%

Corp 3

Bro=30%, Sis=30%, Other=40%

If Other is not the same person, the overlapping ownership between 1 and 2 is 60%, between 1 and 3 is 60% and between 2 and 3 is 50%. If "Other" is the same person (not related to Bro or Sis), the overlapping percentage is 90% across the board. In any event it is a controlled group.

The only arrangement where it would not be a CG is:

Corp 1-

Bro=25%; Sis=30%; Other A=45%

Corp 2-

Bro=30%; Sis=25%; Other B=45%

Here A and B are not the same person and the overlapping ownership percentage is 50%. It would not be a CG, but could be an ASG since more than 10% overlapping ownership and 1 is a service organization.

[Guest Pensions in Paradise]

vebaguru - close, but no cigar. The brother-sister test consists of TWO parts, 50% identical ownership test AND 80% common ownership test. Without knowing more facts we cannot even begin to assume whether they have a CG or ASG.

[Ron Snyder]

IRC Section 1563(a): "(2) Brother-sister controlled group

Two or more corporations if 5 or fewer persons who are individuals, estates, or trusts own (within the meaning of subsection (d)(2)) stock possessing--

(A) at least 80 percent of the total combined voting power of all classes of stock entitled to vote or at least 80 percent of the total value of shares of all classes of the stock of each corporation, and

(B) more than 50 percent of the total combined voting power of all classes of stock entitled to vote or more than 50 percent of the total value of shares of all classes of stock of each corporation, taking into account the stock ownership of each such person only to the extent such stock ownership is identical with respect to each such corporation."

In this case 3 persons own 100%, thus meeting the requirements of (A). Therefore the only issue is (B), as I suggested in my post: Does the overlapping ownership exceed 50%?

[Guest Pensions in Paradise]

If Other is not the same person, the overlapping ownership between 1 and 2 is 60%, between 1 and 3 is 60% and between 2 and 3 is 50%.

But if Other is not the same person for all 3 corps then you won't satisfy the 80% common ownership test. And thus not a controlled group.

[12AX7]

"Other" person is not the same, therefore, not a Controlled Group. I have a good grasp on this concept and have worked with ASGs for professional services companies. This one has me a little baffled because of the company that only processes payroll for the employees that choose group health coverage.

I've already suggested that they file for a DL with a request for IRS to rule on the ASG. They will think about it.

[Ron Snyder]

3 Others + 2 family (bro & sis) = "5 or fewer" which control 100% of the ownership of all entities. Therefore, the only test for CG is the >50% test. The only way you get out of CG status is if bro & sis own 50% or less; if they own >50%, you have a CG. In any event, this has all of the earmarks of an ASG, so they would still have to be covered.

You must include all employees on the payroll for testing purposes, even employees leased to unrelated employers. Benefits provided by the unrelated employers may be included in the nondiscrimination testing.

[Guest jcrawford]

3 Others + 2 family (bro & sis) = "5 or fewer" which control 100% of the ownership of all entities. Therefore, the only test for CG is the >50% test. The only way you get out of CG status is if bro & sis own 50% or less; if they own >50%, you have a CG. In any event, this has all of the earmarks of an ASG, so they would still have to be covered.

You must include all employees on the payroll for testing purposes, even employees leased to unrelated employers. Benefits provided by the unrelated employers may be included in the nondiscrimination testing.

Vebaguru: I think the problem with your analysis is that the "5 or fewer" which you need for the 80% test must EACH own an interest in EACH entity. See the example given in the 414-c regs, in which GHI and W are not members of a control group, even though the group of individuals A, B, D and E owns together 80% of each organization and A and B are in effective control of both:

Organizations

Individuals A GHI M W X Y Z

A.......... 100% 50% 100% 60% 40% 20% 60%

B.......... -- 40% -- 15% 40% 50% 30%

C.......... -- -- -- -- 10% 10% 10%

D.......... -- -- -- 25% -- 20% --

E.......... -- 10% -- -- 10% -- --

--- --- --- --- --- --- ---

100% 100% 100% 100% 100% 100% 100%

[Ron Snyder]

You are mistaken. For the 80% test 5 or fewer must own 80%. Each owner does not need to own an interest in each entity.

For the >50% test, only overlapping ownership is counted, so the shares of owners who own an interest in only 1 entity are not counted.

[Belgarath]

Veba - anyone familiar with my posts will know that I do not by any means hold myself out as an expert in the CG/ASG area. With that caveat, I'm not sure I agree with your above statement. Nor do I disagree, since I'm not certain exactly what you are meaning. So I'll present my two interpretations of what you are saying, and maybe you can let me know which it is?

I find it easier to use the terms "controlling interest" and "effective control." The controlling interest is the "80%" test and the effective control test is the "more than 50%" test.

You state that for purposes of the 80% test (the controlling interest test) that 5 or fewer must own 80%, and each owner does not need to own an interest in each entity.

Interpretation (A). You are saying that if there are, for example, 10 owners, then as long as 5 or fewer own 80% COUNTING ONLY THOSE OWNERS THAT OWN STOCK IN EACH CORPORATION, that not all owners must have ownership in each corporation. Only the 5 or fewer - the rest don't matter. In which case I agree.

Interpretation (B). You are saying that to reach the 80%, you can count ownership percentages of owners who do NOT own stock in each corporation. In which case I disagree. The controlling interest test considers the SAME 5 or fewer shareholders used to satisfy the effective control test. Since the effective control test only counts those with ownership in each corporation, it would be the same for the controlling interest test. This was the finding of Vogel Fertilizer.

Thanks - look forward to finding out which you mean!