Question 229: P and S are in a controlled group. S and A are in an affiliated service group. P is not part of the ASG. P and S sponsor a plan covering their employees. Employees of A do not participate. Is this a multiple employer plan? Would it make a difference if all three companies sponsored the plan?
Answer: We don't have authoritative guidance from the IRS on this issue. Underlying the issue is a difference of opinion on how overlapping groups are handled in general.
High ranking officials of the IRS have said publicly that in this situation, any plan sponsored by any of the three companies must be tested twice, once against the P and S group, and once against the S and A group. It would certainly make sense to file two Schedule T forms if you accept their reasoning, because you must test coverage twice.
Does that mean you have a multiple employer plan subject to IRC 413(c)? I don't think so. Only one "employer," the group of P and S, is sponsoring the plan, and only the employees of that one employer are covered. That does not seem to fall within 413(c). It's a single employer plan with wierd testing. (Wierd is a technical term of art.)
Following that line of reasoning, if A cosponsored the plan, then the plan would fall under 413(c) by its terms. There would be two employers (P and S on the one hand and S and A on the other) with employees participating in the plan. If A did not cosponsor the plan, but P and S decided to cover their employees anyway, then the proposed regulations under IRC 414(m) bring the multiple employer plan rules into play.
By contrast, I contend that if all the employees of P and S have a single employer, and all the employees of S and A have a single employer, then there is one employer. If P=S and S=A then P=S=A. Under my reasoning it is a single employer plan with coverage tested only once. This is true regardless of who sponsors the plan or which employees participate. I believe this approach provides consistency and simplicity, and conforms more closely to the wording of the Code.
This issue is discussed in Chapter 9 of my book, Who's the Employer.