Affiliated Service Group?

[Guest bdb]

I have two companies A and B.

A is owned by 4 equal partners. B is owned by 5 individuals. 4 of them are the owners of A. Their ownership in B is 56%. I have determined they are not a controlled group based on this information.

I need to know how I go about figuring out if they are an affiliated service group.

[Bill Berke]

What do these companies do? At least one of the companies must be providing services and the other, although maybe not a service company, must be working with the first company in providing services to customers. And in the facts you presented, this group clearly passes the ownership test in the ASG rules. My favorite example of a non-service industry (no pun intended) is the banking industry. A service business for IRC purposes is one in which capital is NOT a material income producing factor. Banks need money (deposits) to lend out to make profits - cash is a material income producing factor - banks are not service companies. So, what do your clients do? I teach a rule - if you think it is an ASG, then it probably is.

[Guest bdb]

Company A is an Anestheseologist group. Company B is a Perfusion company. They do work together in some circumstances, however company B was not formed to provide services for company A. For the most part they work in different hospitals. Some times they do work on the same patients in the same hospitals.

[Kirk Maldonado]

You might want to start by reading Code Section 414(m) and the regulations. That's always a good place to start.

[Bill Berke]

The commment "sometimes they work together on the same patient" is a killer. For at least that portion of the respective practices you most likely have an ASG. The question is, is the common patient load suffecient to trap the companies in total. I don't know from the few facts, but I suspect yes. I think that, in addition to the quantity of common patients, how the practices acquired the common patients is among the determining factors, along with proportions of income, time and patient load. But, I could be all wet in this area of all gray. This is one case in which you may want to treat them as an ASG and act accordingly, or go to an ERISA att'y and get the whole situation analylzed. Depending upon the money involved, it may be worth paying for an opinion from competent counsel if the opinion is that this is not an ASG.

[Guest Derrin Watson]

There are three types of affiliated service groups, A-Orgs, B-Orgs, and Management Function Groups (MFG). While I discuss these at length in chapters 13 and 14 of my book, Who's the Employer?, here's a quick and dirty guide. In this discussion, I am limiting things to situations that involve only two entities.

2 company MFG's don't depend at all on ownership. You have a MFG which one company has as its principal business purpose providing management functions to another.

For all other ASG's at least one of the two businesses must be a service organization (a business in health, law, accouting, performing, insurance, etc., or one in which capital is not a material income producing factor). That business is called the FSO.

The other business is called an A-Org or B-Org depending on the type of ASG. An A-Org meets the following requirements:

1. It is an owner or shareholder in the FSO. Any ownership, not matter how trivial, will do. Ownership is determined by reference to attribution rules, which in turn depend on the type of entity involved.

2. It regularly performs services for the FSO or is regularly associated with it in providing services to third parties.

3. It is also a service organization.

In addition, the FSO must either be unincorporated or else must be a professional service corporation.

A B-Org must meet the following requirements:

1. At least 10% of it must be owned by persons who are HCE's of the FSO.

2. A significant part of its business must be performing services for the FSO of a type historically performed in the FSO's field by employees. If payment for such services constitutes 10% of the company's income, then you are assured it is significant.

Let me add that the ownership and attribution rules are critical, and it is best to review them before getting into the fuzzier questions. For example, take your facts. Suppose the two companies are C Corporations. There is attribution from the owner of a C corporation back to the corporation only if the shareholders owns at least 50% of the company. That is not the case on your facts. Accordingly, neither corporation would be deemed to own any of the other, and an A-Org cannot exist.

I disagree with Mr. Berke that an ASG exists "For at least that portion of the respective practices." The question is not whether there is an ASG for a specific act, or even for a division of a company. The question, after the ownership rules are dealt with, in an A-Org relationship is whether the two companies are regularly associated in providing services to third parties. That is determined by looking at the entire relationship of the parties.

Having said that, I do agree with Mr. Berke that "Depending upon the money involved, it may be worth paying for an opinion from competent counsel if the opinion is that this is not an ASG." I strongly disagree that just treating them as an ASG, when you aren't sure or reasonably sure they are, is an appropriate strategy. There can be serious adverse consequences to guessing wrong either way. There is no "safe" course other than the "right" course.[Edited by Derrin Watson on 08-01-2000 at 03:36 PM]

[Guest bdb]

Thank you for all the input. We will be recommending that they seek an opion from an ERISA Attorney on this one. The grey area is to grey. Plus, having not delt with this type of situation before, I have no past case to base my recommendation on.

The client will need to decide if they wish to go through the expense of seeking this opinion or if they simply want to let the other company sign on as a participating employer.