determing controlled group or affiliate service group status

[Kimberly S]

The TPA for whom I work is a tiny division of a much larger company. Management (comprised of people without backgrounds in the TPA world) is being asked by a mutual fund client to have our administrators take on the responsibility of determining new plan sponsors' status as a controlled group or affiliate service group instead of our current practice of requiring them to have their attorney or CPA make that determination for them.

The administrators are not comfortble with this. Several of us have ASPPA designations, one is a CPA, one is CEBS, one is an attorney, several others have no industry designations. We are looking for some published guidance to show management why it is NOT in our company's best interest to honor this request from an important client that they are anxious to accomodate.

Does anyone have any suggested resources?

[Bill Presson]

The TPA for whom I work is a tiny division of a much larger company. Management (comprised of people without backgrounds in the TPA world) is being asked by a mutual fund client to have our administrators take on the responsibility of determining new plan sponsors' status as a controlled group or affiliate service group instead of our current practice of requiring them to have their attorney or CPA make that determination for them.

The administrators are not comfortble with this. Several of us have ASPPA designations, one is a CPA, one is CEBS, one is an attorney, several others have no industry designations. We are looking for some published guidance to show management why it is NOT in our company's best interest to honor this request from an important client that they are anxious to accomodate.

Does anyone have any suggested resources?

You could accept the request and turn around and hire a good ERISA attorney to actually give you the answer. Just make sure your agreement with the attorney outlines what you want.

Edited to add: Be sure to bill them for all your time and the attorney's time (after the point by WDIK below).

[WDIK]

Does this request from the client have anything to do with cost?

[Guest BXO]

You didn't indicate why you are not comfortable. I assume it because of liability. Why is that? You listed a bunch of designations and job titles that should be able to make this determination. Since you work for a large company, why don't you perform the determination and get the larger company to present it to the client with an indemnification or other disclaimer?

[Kimberly S]

Yes it is cost related -- the fund company is afraid that potential clients won't want to pay a lawyer. We charge a flat fee to provide a document (about 10% of fees I've seen for similar services elsewhere) with no way to add on any additional charges for paying our attorney to assist with the determination.

We are uncomfortable because in most cases we don't have enough information. The information that we do get is generally provided by the company's broker, who is unlikely to understand the issue. The biggest issue for us is companies whose common ownership falls below the requirements for a controlled group, but might meet the facts and circumstances test for an affiliated service group.

[Belgarath]

"You didn't indicate why you are not comfortable. I assume it because of liability. Why is that? You listed a bunch of designations and job titles that should be able to make this determination. Since you work for a large company, why don't you perform the determination and get the larger company to present it to the client with an indemnification or other disclaimer?"

I wouldn't be too quick to assume that this function could/should be performed by the TPA. This could very well be considered an unauthorized practice of law. (And I'm not an attorney, so I'm not trying to protect any turf here.)

On a practical level, as Kim mentions, many TPA's in the small plan market simply cannot charge enough for the necessary data gathering, (often like pulling hen's teeth) questioning, analysis, etc., to adequately make such a determination and accept the liability, even if the practice of law issue doesn't faze them.

[Guest BXO]

The original question asked for published guidance on why this should not be done.

Given that, I assumed that cost issues were off the table, as that is an internal squabble where the large company is forcing work onto the smaller company without compensation.

Same with not having enough information - I didn't consider that someone would need published guidance to tell them that they should not perform work where they know they have incomplete supporting information. At least, there has to be an understanding that the work prepared is based on the data supplied.

The unauthorized practice of law is a nice angle, but again, without any substantiation, it doesn't help.

In addition, my initial response took this into account somewhat by requesting an indemnification.

Although not acknowledged by the original poster, it appears that liability has been presented as a legitimate reason to not want to perform this task.

[Kimberly S]

The question is how show our managers that there is any potential liability.

[jpod]

There is a significant degree of potential liability because you are agreeing/volunteering to undertake work that you are likely to perform incorrectly because you are not being given complete or correct information. If you want to protect yourself a little bit, you can do the work based on the information you are given, and then go back to the ultimate client and say "we can't vouch for this; you need to have your own lawyers review the issue," but then you're back to square one and have accomplished nothing.

I've never seen a reputable TPA that undertakes a Section 414 analysis. Am I naive?

[J Simmons]

Kim,

You could purchase a copy of Derrin Watson's book, Who's the Employer, and plop it down on the conference table in front of your management. Maybe turn to some of the diagrams of the more exotic situations, and ask your management about what resources they'll make available for you to perform the due diligence investigations into the background facts, as well as to perform the analysis on the facts turned up--and that it will need to be revisited each testing year to either verify that there's been no change in ownership, or new relationship (business or marriage) between any of the existing owners, or how such changes the most recent analytical conclusions.

Make sure you invite your company's risk management director to that meeting.

[TLGeer]

Tell them to ask their lawyers and CPAs whether its the unauthorized practice of federal tax law. If none of you is admitted to practice as an attorney, a CPA an enrolled agent or an enrolled actuary, you aren't allowed to do it.

[Guest BXO]

TLGeer - please provide some documentation for that assertion. It is an interesting situation. What is the basis for a CPA or enrolled agent or enrolled actuary to practice law? Is the "unauthorized practice of federal law" not limited to attorneys?

In any case, the original poster noted that there was an attorney and a cpa on staff.

jpod: With regards to "reputable" TPAs: I have seen it in reputable firms, but perhaps we work a different definition of that word. Would you classify any TPA that performs a controlled group analysis as "unreputable" ?

Kim Sheek wants to stay away from an ASG analysis, which is understandable given the nature of the analysis. Why would reputable firms not perform an analysis of controlled group status under 1563? I assume they have the resources to be able to make a correct determination. If this leads back to "liability," I am looking for some reputable sources that confirm that point of view, or indicate that this liability is any greater or different than the liability a TPA takes on as a matter of course.

Thanks.

[rcline46]

BXO - yes it is 'easy' to determine a controlled group (maybe) given only the direct ownership of the entities. And if you can get ALL the children, grand children parents, and grand parents named you have a better shot. Oh, did you mention that a trust was involved?

Oh did the owners really tell you who held valid options on their owership? Is the a partnership or LLC in the mix, but brother sister and parent sub situations?

Nah, it is NOT that easy. And the results of being wrong could be disastorous. Get a legal opinion.

Oh, did you know they COULD be a controlled group for income tax purposes, but NOT for qualified plan purposes?

[Guest BXO]

rcline - thanks for confirming that liability is the singular issue we are dealing with here. All the issues you describe apply equally to an attorney as they do to a CPA, TPA or in-house bookkeeper.

Why did you put "easy" in quotes?

[jpod]

BXO: I was referring to the institutional TPAs, like the Fidelitys and the Principals, which sounded like the kind of organization the OP is involved with. I do see the smaller, "hands-on" pension consulting and administration firms assist with 414 analysis, but in my experience they typically they disclaim responsibility in some fashion and tell the client that the issue must be reviewed by the client's legal counsel.

[Guest BXO]

jpod: I understand and agree. Your response tracks nicely with my experience and my initial post on this topic.

[rcline46]

By putting it in quotes I made it a sarcastic remark - ie it is really NOT easy.

[Jim Norman]

Published guidance - you mention some are ASPPA members. ASPPA's code of conduct, page 331 of the 2007 yearbook, under Qualification Standards states that a member shall render advice only when qualified to do so. Notwithstanding your designations, if no one on staff has experience in analyzing CG/ASG situations, then doing so could violate this code.

You mention a CPA on staff, certainly CPA code of professional conduct would include similar language.

Beyond published guidance, it should be pointed out to the powers-that-be that such a determination is rarely a do-it-once-and-you-are-done analysis. Things change. Children under age 21 become 21. Ownership percentages change. Service relationships change, trust beneficiaries change. Stock options are granted and/or expire, etc.

We make the determination when we feel it is clear-cut and within our ability to do so. Some are straightforward, ASGs such as a professional firm that is a partnership of PCs, entities with clearly 80%+ common ownership. Getting into multiple layers of ownership, attribution, trusts and beneficiaries, etc., they need legal counsel.

You do the client no favor by saving them a legal fee in the short run and getting an incorrect answer that leads to bad stuff in the long run.

[Guest mjb]

Taking on controlled group determinations is a business decision that has wider ramifications than whether you are comfortable with it. Providers and fund families are cosolidating their service providers to focus on full service firms that are willing to provide ancillary service to clients. Saying no to CG determination couild result in your firm not receiving any referrals from the mutual fund family in the future. You should get up to speed on CG by attending seminars or hire a qualified person.