Subscribe Now!
Free Daily News, Jobs, Webcasts, Discussions
Display and Distribute
Your Job Openings
COVID-19 News
COVID-19 Webcasts

Featured Jobs

Legal Director

Pension Rights Center
(Telecommute / Washington DC)

Pension Rights Center logo

Plan Compliance Analyst (administrator)

RPA
(Telecommute / Falls Church VA)

RPA logo

Defined Contribution Plan Administrator

Pension Investors Corp of Orlando Inc
(Altamonte Springs FL)

Pension Investors Corp of Orlando Inc logo

Plan Consultant

Advanced Plan Designs, LLC
(Telecommute / Springfield MO)

Advanced Plan Designs, LLC logo

Retirement Plan Consultant

Definiti
(Telecommute / Dallas TX / University Place WA / The Woodlands TX)

Definiti logo

Pension Plan Administrator

Quantech Pensions LLC
(Anaheim CA)

DB/DC Plan Consultant

Small NY Actuarial TPA Firm
(Telecommute / CT / NJ / NY)

Retirement Plan Administrator

Howard Simon & Associates
(Deerfield IL)

Howard Simon & Associates logo

Manager/Supervisor of Benefits and Payroll Compensation

Virginia Farm Bureau
(Richmond VA)

Virginia Farm Bureau logo

Administration Manager

Southern Pension Services
(Telecommute / Tampa FL)

Southern Pension Services logo

Retirement Plan Relationship Manager

Prosperity Advisors, LLC
(Akron OH)

Prosperity Advisors, LLC logo

Administration Assistant

Southern Pension Services
(Tampa FL)

Southern Pension Services logo

Retirement Plan Administrator

Carpenter Morse Group
(Telecommute / Longwood FL)

Carpenter Morse Group logo

Free Daily News and Jobs

“BenefitsLink continues to be the most valuable resource we have at the firm.”

-- An attorney subscriber

Mobile App image LinkedIn icon
Twitter icon
Facebook icon

BenefitsLink > Q&A Columns >

Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Construction Management Function Group

(Posted May 23, 2001)

Question 102: A construction company (CC) is owned 50% by two brothers, Joe and Chuck. Joe and Chuck receive 100% of their compensation from a construction management company (CMC) that is owned 100% by Steve, an unrelated individual. Currently 85% of CMC's revenue comes from CC; the rest comes from outside clientele. Is CMC a separate employer, which can establish a plan totally unrelated to the construction company CC?

Answer: I'd say no.

IRC 414(m)(5) says that two businesses are in an affiliated service group when one of them has as its principal business purpose providing management functions to the other. I'd want to explore what services CMC is providing to CC, but because you describe it as a management company I'll start from the proposition that it primarily provides management functions. Unfortunately, there's no formal definition of a "management function."

If 85% of my revenues come from managing your business, I'd call that my principal business purpose, wouldn't you? In fact, although the term management function remains undefined, I'd say that if more than half my revenues came from managing you, then that was my principal business purpose.

So, would you like to juggle things so that CC accounts for only 49% of CMC's revenue? (Maybe have Joe and Chuck take a salary from CC -- a shocking proposition!) Would that take you out of "principal purpose"? Maybe, but as I said, we don't have a definition. I wouldn't feel comfortable unless the percentage were less than that. If a client came to me at 49%, I'd urge the client either to lower it further or to seek a formal determination letter from the IRS. Given the current uncertainty, there's no way that I, as an attorney, could give an opinion letter at that level.

Of course, where you are now, well above 50%, I'd be willing to give an opinion that an ASG definitely exists under 414(m)(5), assuming the functions involved are management functions. If CMC wants to establish a plan, it will need to take into account the employees of CC.

The affiliated service group rules are discussed in more detail in Chapter 13 of my book, Who's the Employer?.

By the way, this question gives me a good opportunity to remind my readers of the caveat on the front page of my column. This column is just that, a column. It is not legal advice. I generally don't have enough facts in answering these questions that I'd want to give legal advice. Particularly in a management function group situation, one needs to probe in order to understand exactly what's being done.

The purpose of this column is to outline general principles applicable to hypothetical situations. Once one gets behind a quick statement of facts, often there are significant issues which were not mentioned. Although I believe the responses I give in this column are accurate, in preparing the responses I don't do the level of research and verification that I do for clients when I give a formal legal opinion.

Use this column to educate yourself on the issues involved and to point your thinking to the questions you need to ask. But don't rely on it as the last word. If you need a legal advice, get it from me or another qualified attorney after agreeing to establish an attorney-client relationship and then explaining your situation to the attorney in detail. Don't rely on this or any other web posting as legal advice -- it isn't.


Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.


Copyright 1999-2017 S. Derrin Watson
Related links:

(restricted access)

(restricted access)

© 2021 BenefitsLink.com, Inc.