1 business in U.S., one in Puerto Rico

[Belgarath]

Let us say a doctor has a clinic in the U.S., and he's a 100% owner. He's also a 100% owner of a clinic in Puerto Rico. If the U.S. clinic establishes a plan, is it a controlled group and must he include the Puerto Rico employees?

I believe it IS a controlled group. I find no dispensation for this in the CG rules. HOWEVER, it sems to me that he can perhaps make a valid exclusion from his U.S. plan of all the Puerto Rico employees if they receive no U.S. source income. So this would allow him to exclude them all and still pass testing.

Agree/disagree? thoughts? Thanks!!

As I look into this further, I think my initial opinion was probably incorrect. It appears to me that the Puerto Rico employees will generally need to be included, or at least included for testing purposes. It may be possible to exclude them on a "regular" basis such as for hours, or by classification if you can still pass coverage testing. There's no exception in the controlled group/affiliated service group rules, and it appears that the exclusion under IRC 410(b)(3)© - that is, for employees who are non-resident aliens and receive no U.S. Source Income - is not generally available for employees in U.S. possessions. See the following from Revenue Ruling 2008-40 - emphasis is mine. There might possibly be some "wiggle room" on this, but apparently many Puerto Rico workers are either U.S. citizens OR are considered U.S. residents for income tax purposes. I guess it would require an ERISA or tax attorney to apply this to the specific situation with the Puerto Rico employees.

4. Application of section 410(b) to U.S. plans of employers with excluded Puerto Rico employees. (a) Background. Section 410(b) requires the sponsor of a qualified plan to include all employees in testing coverage regardless of whether the employees benefit under the plan. Section 410(b)(3) provides certain exceptions to this coverage requirement, such as §410(b)(3)© which permits the exclusion of nonresident aliens who receive no U.S.-sourced earned income from the employer. However, employees in possessions of the United States, such as Puerto Rico, are not excluded from coverage testing under §410(b)(3)© because they generally are not nonresident aliens. Section 410(b) also precludes the aggregation of a nonqualified plan, such as a plan qualified only under the Puerto Rico Code, with a qualified plan for purposes of testing coverage.