How Does IRC 404(a)(3) apply in an affiliated service group?

[J Simmons]

Situation: A single-employer QRP is sponsored/participated in by several ERs part of one ASG. (But it is not an affiliated group under IRC sec 1504.)

One of the ERs has one EE, who earns $100,000. That EE would like to accrue $46,000 in benefits, and given the overall demographics, the plan will pass x-testing doing so. However, $46,000 is greater than 25% of $100,000.

If the IRC sec 404(a)(3) deduction limit applies ASG-wide, then this ER could make the $46,000 contribution for its only EE and deduct it because other ERs in the ASG are not making less than 25% of the aggregate compensation of just their EEs.

On the other hand, if IRC sec 404(a)(3) is separately applied per ER, then this specific ER could contribute no more than $25,000 for its sole EE.

Does IRC sec 404(a)(3) apply separately to each ER in an ASG or is it applied plan-wide, allowing disproportionate use of the deduction limitation by different ERs in the ASG?

[Guest Sieve]

These are the general rules -- The regs indicate that the deduction limitation is "based on the compensation otherwise paid or accrued by the employer during such taxable year to employees who are beneficiaireis under the plan". (Treas. Reg Section 1.404(a)-9(b), my emphasis.) That would apply the deduction on a per employer basis (not a per plan basis). Likewise, IRC Section 413(b)(6), relating to multiple-employer plans, requires that the deduction limitations "shall be determined as if each employer were maintaining a separate plan".

As to an affiliated service group, all employees of the ASG are generally treated as if employed by one employer, but not for the deduction provisions of IRC Section 404. (See IRC Section 401(m)(1) & (4).) Likewise for controlled groups under IRC Sections 414(b) & ©. And, since you do not have an affiliated group under IRC Section 1504, these employers are NOT treated as one employer for deduction purposes, and the general rules described above apply. Sorry . . .

[J Simmons]

Thanks, Larry.

The situation does not involve a MEP (multiple employer plan).

My question pertains to a 'single employer plan' sponsored by members of an ASG. As to a CG, IRC § 414(b) provides "With respect to a plan adopted by more than one such corporation, the applicable limitations provided by section 404(a) shall be determined as if all such employers were a single employer, and allocated to each employer in accordance with regulations prescribed by the Secretary." Treas Reg § 1.414(b)-1(b) provides: "Single plan adopted by two or more members. --If two or more members of a controlled group of corporations adopt a single plan for a plan year, then ... the applicable limitations provided by § 404(a) shall be determined as if such members were a single employer. In such a case, the amount of such items and the allocable portion attributable to each member shall be determined in the manner provided in regulations under §§ 412, 4971, and 404(a)." The reference to Treas Reg § 1.404(a)-9(b) does not answer the question, it begs it. When applying the IRC § 404(a) deduction limits, is the employer (as mentioned in that reg) each business entity or the control group or affiliated service group treated as one employer?

When it comes to ASGs, Treas Reg § 1.414(m)-1(b): "Except as provided in paragraph ©, all the employees of the members of an affiliated service group shall be treated as if they were employed by a single employer for purposes of the employee benefit requirements listed in § 1.414(m)-3." Treas Reg § 1.414(m)-3 specifies many of the QRP requirements, but conspicuously absent since it was mentioned in the context of CGs is IRC § 404(a), which is in line with IRC § 414(m)(4) as well.

When it comes to a CG, the IRC § 404(a) deduction limit appears to be able to be shared disproportionately by members of the CG to provide benefits to their respective EEs. The question really is whether the lack of mention in IRC § 414(m)(4) and in Treas Reg § 1.414(m)-3 of the IRC § 404(a) deduction limit mean that with an ASG the IRC § 404(a) deduction limit is applied on a business entity-by-business entity basis or in the absence of mention either way, the CG rule would apply by analogy to ASGs?

[J Simmons]

For those interested, I found this Q&A by Derrin S Watson on this topic

http://benefitslink.com/modperl/qa.cgi?db=...loyer&id=36

[Guest Sieve]

This is a mixed bag, and probably is, in fact, a multiple-employer plan. Bear with me while I explain. (Thanks for pointing out my faux pas re: deductions for controlled group members, by the way. It helps to read the entire Code Section--actually, it sometimes helps NOT to read the entire Code Section. )

If you look at the proposed 414(m) regs--specifically, 1.414(m)-3©(1)--it says that ASG members are treated as if each maintains the plan when one member sponsors the plan and the plan covers an employee of another member of the ASG, and goes on to say that the plan therefore is treated as a multiple-employer plan. It then concludes that the member maintaining the plan can take a deduction for the contribution made on behalf of the employee of the ASG member not maintaining the plan. Unfortuantely, the proposed regs were issued in 1983, when IRC Section 413©(6) treated all members of a multiple-employer plan as one employer for deduction purposes ("Each applicable limitation provided by section 404(a) shall be determiend as if all participants were employed by a single employer")--but that Code provision was amended into its current form by TAMRA (1988), so the statement in the proposed regs that says the deduction is allowable is probably voided by the change in the Code (which now treats such employers separately).

At the same time, there is no reason to believe that the multiple-employer plan conclusion of the proposed regs is changed. Even though your situation--where 2 members of an ASG participate in the same plan--is not exactly like the wording of the proposed reg., certainly that reg. is consistent with treating your plan also as a multiple-employer plan. Since the regs. would treat it as a multiple-employer plan when only 1 ASG member sponsors the plan but the plan is "considered to be maintained" by another ASG member, why would it NOT also be a multiple-employer plan if 2 members of an ASG participate? So, it would seem, if we rely on the proposed 414(m) regs, that the deduction is not applied on a single-employer basis based on the current state of Code Section 413©(6).

That being said, I would suspect that the multiple-employer plan conclusion in the proposed regs was reached specifically in order to permit the deduction limits to apply on a single-employer basis to an ASG. The ASG statute obviously did not specifically permit it, but the Code Section 413© rules did. The Service probably saw no difference between an ASG and a controlled group for pension purposes, yet Congress had not applied a combined Section 404 limits to ASGs. So, Treasury got there through the back door of Code Section 413©(6)--a door which closed a few years later with the TAMRA amendment. (I have not looked at the legislative history of the TAMRA change to Code Section 413©(6), but that might be an interesting exercise.) So, you can make an argument, as you suggest, that there really ought to be no difference between controlled groups & ASGs with regard to Section 404 (except, of course, the statutes are different, and Section 404 doesn't apply to ASGs--by statute--as it does to Sections 414(b) and ©). I think that might be a hard argument to make, though (without seeing what the committee reports say), precisely because the statues are different as to Section 404.

Which way to go? It's your plan, so it's your call . . .

[Guest Sieve]

Hey, John . . . I would have been interested before I started the research--all that work & you go and find the same result in Derrin's book!! You owe me BIG TIME!!! (Of course, I would never let on that it was, in a crazy way, an interesting inquiry, to say the least . . .)

[Guest dms9999]

Old thread but some great stuff in here.

If you have an ASG situation like this:

LLC taxed as partnership with 4 doctors as the partners (not equal ownership) who each have their own entities outside the partnership where their practice income is derived. LLC is essentially an expense sharing agreement between the doctors where the rent, insurance, employees etc. are paid but I think it is hard to argue that an A-Org ASG does not exist.

Safe Harbor 401(k) with class allocated contribution is established.

Doctors have no income from the LLC (partnership) but the wages are paid to employees from the LLC.

Based on the assumption that 404(a) applies to the ASG in the same manner it applies to a multiple employer Plan, under what premise can the doctors make deductible contributions to the LLC employees? How is it determined what percentage of the contributions made on behalf of the employees are required to be made by each partner (do I take the ownership of the LLC and tell each partner they owe their respective percentage)?

So if the ASG is treated as a ME plan for deduction purposes (and the deduction limit is calculated individually based on the income for each doctor's practice outside of the LLC), how can one of the doctor's take a deduction for a contribution they make on behalf of an employee of the LLC? If A and B are in a ME Plan, A cannot make contributions on behalf of B employees and deduct them?

Thanks, Matt

[J Simmons]

How do the doctors fund (and get a tax break) the LLC so that it can make payroll and other expenses? The funding (and tax break) for the LLC to make contributions to the plan for retirement plan purposes ought to work in the same way.

[Guest dms9999]

How do the doctors fund (and get a tax break) the LLC so that it can make payroll and other expenses? The funding (and tax break) for the LLC to make contributions to the plan for retirement plan purposes ought to work in the same way.

So just make sure the CPA runs the retirement plan expense for the employees through the LLC and I am good on the deduction for the LLC employees and the deduction for each partner's contribution would be done on an individual basis through their practice?

I get the feeling that each individual practice was taking the deduction for the contributions made on behalf of LLC employees which is my concern..... Thoughts on this?

[J Simmons]

The deduction for the employer contribution for LLC employees to the qualified retirement plan should be taken on the LLC's Form 1065, not on the returns of the doctors' individual entities. The employer contributions to the plan for a doctor should be declared and taken as a deduction on tax return for the doctor's entity.

To fund the LLC (including for the monies needed to make the retirement plan contribution for LLC staff), the individual doctors' entities could be billed for the support services provided by the LLC staff to that doctor's entity. That would generate a tax deduction for the doctor's entity, but not as an employee benefit expense for the doctor's entity. The difference probably nets out, but if the IRS examines a return of a doctor's entity, this could be a problem to get it all sorted out.

[J Simmons]

By the way, the revival of this thread reminds me that I owe Sieve BIG TIME!!!

[Guest Sieve]

Hmmm. I'd already forgotten about that. July is eons ago!!! So, John -- someday, when you least expect it . . . (Actually, the debt has been repaid many times over.)

(Aside from Andy t.a., who's old enough to remember where "Someday, when you least expect it" comes from?)

[J Simmons]

Bogart in Casablanca

[Guest Sieve]

Not what I was expecting, and much more sophisticated than what I remembered--Allen Funt on "Candid Camera" (the original).