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Management function group and controlled group
(Posted March 16, 1999)
Question 16: The principal business of A is performing, on a regular and continuous basis, management functions for B and C. B is not related (as used in 414(m)(5)) to A or C, but C is a wholly owned subsidiary of A. A does not have any other significant source of revenue, and does more work for (and receives more income from) B than it does from C. Are A and C members of a "management" affiliated service group under 414(m)(5)?
Answer: No, but A and C are a parent-subsidiary controlled group under 414(b), or a group of trades or businesses under common control under 414(c). If you are dealing with a wholly owned entity, that is the case.
Now, A and B are a management function group under 414(m)(5). The manager of a management function group must have as its principal business purpose providing management functions for 1 other entity (or for 1 entity and businesses related to that entity). Whether measured by time or revenue, in this case it appears that this 1 entity is B. However, C is not related to B, and is technically not part of the management function group.
So, here you have A in a controlled group with C and in an ASG with B. All employees of A and C are deemed to be employed by a single employer for most plan purposes (as defined in 414(b) and (c)), and all employees of A and B are deemed to be employed by a single employer for most plan purposes (as defined in 414(m)).
What are the differences? Well, for one thing, A and C could be broken apart for testing under the Qualified SLOB rules (there's no SLOB like a Qualified SLOB), but A and B cannot. For another, if all three jointly sponsor a plan, A and C can compute a single deduction limit, while B would have its own separately computed limit (assuming the plan was adopted after 1988).
One interesting question arises as to whether the three are treated as a single entity for purposes of 410 and 401(a)(4). I say yes. If A=B and A=C, then A=B=C. Dick Wickersham and Jim Holland disagree, thinking that you must test separately for the group of A and B and then test for the group of A and C.
Management function groups, and other affiliated service groups, are discussed at length in Chapter 13 of my book, Who's the Employer?
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