Controlled Group Question

[flosfur]

Jill owns 100% of company A and owns 48% of company B.

Jack, ex-spouse of Jill, owns 48% of company B and Johnny, son of Jack & Jill, owns 2% of company B.

Company B is a manufacturing company and company A is a distributor of products made by B and other companies.

1) Are A & B a controlled group of companies?

2) Is this a brother-sister organization or affiliated service group?

The issue:

A maintains a DB plan. Does the plan need to cover the employees of B?

[Guest Sieve]

For pension purposes, under the facts of your hypo, there is no controlled group, brother-sister or otherwise (although, if ownership was the same while they were married, there would have been a bro-sis controlled group). It appears that there also is not be an affiliated service group (unless one entity performs management functions for the other), since capital is a material income-producing factor of each entity and therefore neither entity is likely to be a service organziation. (Prop. Treas. Reg. Section 1.414(m)-2(f).)

As an aside, remember that even if there is a controlled group or ASG relationship, it doesn't mean that one company must offer the same retirement plans to employees of the other company. It just means that coverage testing (IRC Section 410(b)) for any tax-qualified plans must consider all employees as if employed by a single employer. If coverage testing fails, there may be ways to fix which do not include offering the plan to employees of the other organization.

[Bill Presson]

Assuming Johnny is under age 21 (which we haven't been given), why doesn't he own 100% of both organizations via attribution, thus creating a controlled group?

[K2retire]

Assuming Johnny is under age 21 (which we haven't been given), why doesn't he own 100% of both organizations via attribution, thus creating a controlled group?

In that case he would.

[Guest Sieve]

Or, even if Johnny is not a minor, it will be a controlled group if there is any other minor child of the 2 of them, whether or not that minor child actually owns any stock in A or B.

[SoCalActuary]

We have another forum on Benefitslink for this question. Why is it in the DB forum?

And, I still don't believe that Congress' intent was that John Edwards' little "extra" made the momma a part of the "controlled group".

[K2retire]

We have another forum on Benefitslink for this question. Why is it in the DB forum?

And, I still don't believe that Congress' intent was that John Edwards' little "extra" made the momma a part of the "controlled group".

Congress' actions often have a different impact than their intent.

[SoCalActuary]

The most recent IRS audit I saw did not have any discussion of minor children with non-spouses.

Further, un-wed mothers don't always acknowledge who the male parent was. On top of this, there is all the funky family law stuff that comes from denying paternity, DNA testing, fertility clinics and sperm donors.

I say all this to point out that the minor child issue is taken way too seriously here. The IRS does not try to push this issue in any of the plans I have experienced since 1971.

Now if the minor child actually has title to an asset, then the comments here make a lot more sense.

[Guest Sieve]

SoCal --

Here, where the child is the product of the marriage, do you think we ought to be cautious/conservative, or, in your opinion, does caution enter into the formula only if the parents are still married?

[SoCalActuary]

SoCal --

Here, where the child is the product of the marriage, do you think we ought to be cautious/conservative, or, in your opinion, does caution enter into the formula only if the parents are still married?

My point is this: We are a lot more worried about it than the IRS agents who audit plans. Why is that?

Are we reading more into the laws than the IRS intended? Have these ideas been vetted with the congressional staffers as to intent?

For example, which sports figures include all their former honeys in their testing who bore a child?

Do all entertainers have to carry their ex-wives/ex-lovers/ex-live-ins with a child? How about John Edwards and his implausibly denied lovechild? What would Ira Cohen/Issy Goodman/Al Lurie or other old-time ERISA folks say?

I just want better answers and open dialogue about this interpretation from authoritative sources who actually enforce ERISA.

[Guest Sieve]

Well, we'd all like better answers from those who enforce ERISA. Absent that, however, I probably can't advise my clients on what Izzy Goodman may have thought. So, since I'm professoinally conservative by nature, that means that the words of the statute--and Congressional & IRS silence for eons--cause me to alert my clients to the possibility and plan around it, if possible. (I haven't had much success with crossing my fingers in the past--which explains my conservative nature, I guess. )

[SoCalActuary]

I understand the caution.

Now, is this a good client questionnaire?

Mr. X, you are listed as owning a portion of the profit interests of this company.

Do you have any minor children? Did you acknowledge paternity of any other minor children?

Do you know the business ownership of their other parent? (Ha Ha, like that will happen with alimony games)

Do you have the complete census of their employees? Do you know which are union employees or foreign nationals?

Do you know the benefit amounts or annual allocations of each employee? How about their account balances?

Mr. X, your wife acquired presumed ownership in this company during the period of your latest marriage.

Can you answer all these questions for her? Does she have minor children from another male?

What businesses...employees...accounts....?

Is this your client questionnaire?

[K2retire]

You are absolutely right that the possible scenarios are ludicrous. But I don't think that means that we can ignore known children of an existing or prior marriage just because the law is ridiculous.

[Guest Sieve]

Like K2 says, we aren't going overboard here--just dealing with known children, known spouses, known grandchildren, know siblings, etc. Due diligence kinds of things. Weighing reward vs. risk as part of the analysis.

I had a client with a minor child--each parent owning 100% of a separate business--who told me that he thought the rule was absurd, and he was not going to be concerned about it. But he was informed of the rule and the risk, and simply made a business decision to move forward in spite of it all. His call, made with all relevant info in hand. That's how it should be.

Now, if you were doing an estate plan for Shaquille O'Neal, or for Steven Spielberg, or even someone worth a paltry $50 million, should your questions be included in the client questionnaire? Absolutely.

So, as with any other close ERISA questions, it just comes down to facts & circumstances. I'll have my questionnaire and you have yours.

[J Simmons]

I'll weigh in on the side of caution, espoused by K2retire and Sieve. In the past year I've spent a great deal of time advising business managers for school districts that simply cannot get their head around why the IRS is imposing new regs on 403b plans now. When I've explained that the universal availability rule has long been in the statute, why is the IRS just now pushing its enforcement? is the comeback.

I'd rather have a client tell me that a rule I've just advised him or her about is ridiculous than to have him or her later ask why I didn't warn about the risk being taken.

[flosfur]

Assuming Johnny is under age 21 (which we haven't been given), why doesn't he own 100% of both organizations via attribution, thus creating a controlled group?

He is not a minor.

[flosfur]

We have another forum on Benefitslink for this question. Why is it in the DB forum?

....

Which one? If there is another appropriate forum then the moderator should have moved my message to that forum!