Control Group with Non-Profit

[Sarah R]

Hello, we have a non-profit establishing a safe harbor 401(k) plan. The main director of the non-profit also owns 100% of two other for profit corporations with employees.

The rules states: (b) General rule. For this purpose, common control exists between an exempt organization and another organization if at least 80 percent of the directors or trustees of one organization are either representatives of, or directly or indirectly controlled by, the other organization. A trustee or director is treated as a representative of another exempt organization if he or she also is a trustee, director, agent, or employee of the other exempt organization. A trustee or director is controlled by another organization if the other organization has the general power to remove such trustee or director and designate a new trustee or director. Whether a person has the power to remove or designate a trustee or director is based on facts and circumstances. To illustrate the rules of this paragraph (b), if exempt organization A has the power to appoint at least 80 percent of the trustees of exempt organization B (which is the owner of the outstanding shares of corporation C, which is not an exempt organization) and to control at least
80 percent of the directors of exempt organization D, then, under this paragraph (b) and §1.414(b)-1, entities A, B, C, and D are treated as the same employer with respect to any plan maintained by A, B, C, or D for purposes of the sections referenced in section 414(b), (c), (m), (o), and (t).

Since the director of the non-profit is also a representative of the other organizations by virtue of owning them / being President, etc., I interpret this to be a control group situation between the three organizations. The for profit companies do not have any direct control over or involvement with the non-profit so the client disagrees with my interpretation. 

Thoughts?

Thank you!

[CuseFan]

Does the tax-exempt board (not this lone director) have any say over the for-profit entities? I assume no. Do any of the for-profit entities have the ability to appoint 80% or more of the tax-exempt directors? My guess is also no, unless this main director/F-P owner has such control over the tax-exempt that he can appoint all or most of the other directors. if, and only if in my opinion, that is the case would there be a control group. Whether the organizations have anything to do with each other is, as you know, irrelevant when determining a control group. if I'm 100% owner of a car dealership and also run/100% control a tax exempt foundation, still a control group. However, check out the Qualified Separate Lines Of Business rules - those might help.

[Luke Bailey]

I agree with CuseFan. I would follow the regs (no controlled group) unless the "main" director (not really sure what that is; maybe board chairperson?) is in effect a straw person. Assuming the capital to purchase the for-profits or initially capitalize them came from the director's personal assets and he/she has the potential profit from them, they are related to each other, but not to the nonprofit. Of course, if the nonprofit promotes or subsidizes the for-profits, this could pose difficult federal income tax (outside of 414(b) and (c)) and state nonprofit corporation law issues, but I assume that is not happening here.