Affiliated Service Group

[Guest johnpetrancosta]

Background:

5 individual unrelated doctors with separate practices entered into an overhead cost sharing arrangement. They created an LLC to pay the overhead costs and bill each practice for their respective share of the costs.

Facts:

1. Overhead LLC is owned 20% each by Doctors A,B,C,D & E.

2. Dr. A owns 100% of his own LLC.

3. Dr. B. owns 100% of his own S. Corp

4. Dr. C. owns 100% of his own S. Corp.

5. Drs. D&E each own 50% of their own LLC

6. Drs. D&E also each own 50% of their own S. Corp.

7. Both practices owned by Drs. D&E are covered under the same plan.

8. Overhead LLC has no HCEs.

9. The doctors are the only HCEs in their separate practices.

Issue:

Currently there are 5 separate plans. One each for:

1. Overhead LLC

2. LLC for Dr. A.

3. Scorp for Dr. B

4. Scorp for Dr. C

5. LLC and Scorp for Drs. D&E.

Assume:

1. The plans are dissimilar

2. The plans will not pass coverage or discrimation testing allowing them to be permissively aggregated.

Question:

Do I have an affiliated service group that needs to be covered under one plan? What regs and code sections do I need to quote?

[J Simmons]

From the facts you've drawn out, it is probable that you have 4 affiliated service groups (ASGs). ASG one is between Overhead and A. ASG two is between Overhead and B. ASG three is between Overhead and C. And ASG four is between Overhead and the controll group D&E (their LLC and S Corp). Any plan that benefits anyone in an ASG must take into account all of the employees of any component member of the ASG, when testing. (Diagrammed out with Overhead in the center and the other four around it, you could draw separate elipitical circles including Overhead in each one and only one of the A, B, C or D&E for each--looking like a 'daisy', ergo, arrangements like these are sometimes referred to as a daisy wheel of ASGs.)

Overhead has no HCEs, and thus has no problem demonstrating nondiscrimination and therefore should not permissively aggregate with any of the other plans you mention. If a plan of A, B, C, or D&E have the same plan year as Overhead, then that plan may specify in its governing documents that such plan is permissively aggregating with the Overhead plan. Depending on the testing method and the contributions for the Overhead plan employees, the permissively aggregated plan of the doctor(s) might pass. For example, suppose that 5% of pay is contributed for all Overhead employees into the Overhead plan, that at least 3 of those 5 percentage points contributed is 100%, immediately vested and a 401k safe harbor notice was posted for that plan for the year. If the B plan has the same year as the Overhead plan and the B plan specifies that it is permissively aggregated with the Overhead plan, then the B plan can permit B to make 401k elective deferrals to the B plan up to the 402g limit ($15,500 for 2007; $20,500 if at least age 50 by year's end). B is an S Corp, so it could also have a cross-tested formula and give B more (the gateway is satisfied in the Overhead plan with the 5% of pay contribution assumed for this example). So B could perhaps receive in employer contributions from the S Corp to the B plan another $29,500.

Because A is a single member LLC, even if the A plan is on the same plan year as the Overhead plan and the A plan specifies that it is permissively aggregated with the Overhead plan, A would likely be limited to just the 401k elective deferrals--concerns for nonqualified CODA given recent informal comments by IRS officials.

[Guest johnpetrancosta]

I'm not sure I'm following. When I read Section 318 3 b, Attribution from partners to their partnership, it seems to state that if a partner in a partnership has an ownership interest in another organization, that interest is attributed to the partnership. With the facts I presented, it would seem that the ownership interest in the practices held by A,B,C and D&F would be attributed to Overhead LLC. If this is the case, wouldn't I have one affiliated service group.

Additionally, if Overhead LLC is an affiliated service group with each separate entity, doesn't that mean it has to be covered under the same plan with each entity. If so, does that mean that each entity can maintain their separate plans so long as each entity covers the employees in Overhead LLC?

[J Simmons]

Good point on 318(a)(3), and that would make each of the doctors' separate entities controlled subsidiaries of Overhead--a control group.

Each of the doctor's entities could have its own plan without necessarily covering the Overhead employees. So long as it can pass the applicable tests, a plan can cover less than all employees. Through permissive aggregation by the doctor's entity's plan with the Overhead plan, the doctor's entity's plan might be able to demonstrate nondiscrimination (401a4) and minimum coverage (410b). All the employees of the control group--Overhead's employees and all the doctors--would have to be taken into account in testing under each plan. Through permissive aggregation, a doctor's entity's plan could "play off" of the contributions allocated to the other employees under the other plans of the control group.

If a doctor's entity's plan is a defined benefit plan, then that plan (given the numbers of employees you have) will likely have to cover some of the Overhead employees in order to meet minimum participation. 401a26.

[atypicalguy]

This is obviously a 12 year old thread, but it pertains almost exactly to my situation. 

I have an S-corp for my medical practice. No retirement plan, because I also own part of a professional services organization with four other doctors. I do not have a controlling interest or even a voting interest in the PSO. It does all the billing for all doctors, pays all the employees (about a hundred), and cuts checks to my medical corporation minus the agreed overhead figure. The PSO is paying me a salary and then pays the remainder of money owed to me each month above the agreed salary, based upon the actual amount of revenue generated that month.

The PSO has a registered 401k. It has exclusionary criteria that are income-based. I am not allowed to participate. It is aimed mainly at the non-professional employees.

Because I am not allowed to contribute to the PSO 401k, I would like to establish a retirement program for my own S-corp. It would be nice if it were a Defined Benefit program, though from the above posts it seems that this option might need to be offered to employees of the PSO also in order to stay within the rules. If not allowed, then I would like to establish a 401k or other plan that would allow me to make pretax retirement contributions. 

I called an actuary and she thinks that because my S-corp is part of an ASC, that it is not possible for me to have a separate retirement plan under the S-corp. This seems illogical, because I should be eligible to participate in at least one retirement program, and I am not able to participate in the PSO plan.

The posts above seem to suggest that my S-corp might be able to have its own program, if certain conditions are met. If that is true, I would like to know what the conditions are and how to meet them, so that I can contribute some funds to my S-corp plan before October.

Thanks in Advance. I am happy to pay for advice, if qualified.