ASG: Are Schools/Day Cares service organizations?

[Appalachian_Trail]

If a company is in the business of offering early childhood education (infant to pre-K), kindergarten, before and after school programs, and summer programs do you think that constitutes a service organization?

I've reviewed the Who's the Employer's ASG chapter and conducted supplementary research, but I can't find anything on-point. I know educational services do not count as consulting, so that avenue is closed.

I lean towards concluding that the school is a service organization because the material income producing part of their business is the teachers' services, rather than capital. But I could be persuaded the other way too.

[Peter Gulia]

If more than one interpretation could be a reasonable interpretation, consider writing an explanation of each plausible interpretation—and the advantages, disadvantages, and risks of each—so your client can make an informed decision about which interpretation it will use.

Or, doing the work to research and write an explanation might help you refine your thinking, with one interpretation becoming clearer or stronger, and another interpretation seeming weaker.

[austin3515]

On 12/3/2025 at 3:41 PM, Appalachian_Trail said:

I lean towards concluding that the school is a service organization because the material income producing part of their business is the teachers' services, rather than capital. But I could be persuaded the other way too.

Absolultely.  When you compare a day care with a machine shop or Walmart, there are stark differences. It would be quite dangerous to argue a day care is not a service business.  They might have a huge playscape that they paid a lot for, but is that playscape a material income producing factor?  I don't think so...

Plus to me it seems like the danger lies in assuming NOT a service business.  To err on the side of caution means concluding it IS a service business.  I personally would not assume it was not a service business wihtout a letter from an attorney.

[Peter Gulia]

Or a letter from a certified public accountant who is eligible to practice before the IRS.

[austin3515]

LOL, all of those designations mean nothing compared to my true claim to fame - International Man of Mystery!  Though if you do seek an ERISA attorney, I know a good one!

Here is a little more color. Assume a day care center is called Day Care I, LLC.  Day Care I, LLC is owned by Susan 100%.  Susan owns 51% of Day Care II, LLC and Day Care III LLC and the manager of those facilities own 49%, respectively (two different people).  They have one website, DayCare.com.  All three locations are listed and co-branded.  Taking the position that this is an Affiliated Service Group would be very conservative and reasonable based on my position that a playscape is not a material income producing factor for a Day Care center.  Having one 401k for all three and running one ADP test, I just don't see how that could be challenged. If you want to take the other position, I strongly endorse one Peter Gulia to do an analysis of the facts and circumstances to see if it can be defended.  For example, maybe Susan wants a SH Match 401(k) for her employees in Day Care I and knows it would never pass coverage taking into account Day Care II and Day Care III (the other owners do not want to spend the money).  That could be a reason to investigate that position.  But as a TPA, I would not endorse administering that way without a "Peter Guiia" letter in the file approving it.

Note: I did not look up the ASG rules here, but I'm pretty sure because they are not professional service entities, the entity type stuff is not an issue.  My example is based solely on the affiliation and common ownership.  I'll note the original question made no reference to whether there was an affiliation, but I assume the question would not have been asked otherwise.