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BenefitsLink > Q&A Columns >

Who's the Employer?

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

Mortgage Company as Service Organization

(Posted September 18, 2001)

Question 130: Two people own a mortgage company. The same two people own more than 50%, but less than 80%, of a title company. The title company performs most its work for the mortgage company. Another entity owns the balance of the title company and provides a 401(k) for itself and the title company. Our client is the mortgage company. Is this an affiliated service group? I've read that banks and other financial institutions are not considered to be A-Orgs, but I don't know if this applies to mortgage companies.

Answer: This question, like many traditional ASG questions, turns on the definition of a service organization. If a business is not a service organization, it cannot be a "first service organization" or an "A-Org."

An organization cannot be a service organization unless it meets one (or both) of these requirements:

1. It is in the field of health, law, accounting, engineering, actuarial science, insurance, performing arts, or consulting; or

2. Capital is not be a material income-producing factor.

The proposed regulations specify that capital is a material income producing factor for banks and similar institutions, but that's really a "no-brainer." Capital is what they sell.

Now, take a look at the mortgage company. Is capital a material income-producing factor? If the company is investing in the mortgages itself, then most definitely capital is material. On the other hand, if all the company does is put homeowners and investors together, without putting any of its own money on the line, then the issue becomes cloudy. The proposed regulations also note that capital is not a material income-producing factor if the income comes primarily from fees or commissions for personal services performed by one or more individuals. How do you (or better, an attorney giving an opinion) tell in a specific case? Look at the balance sheet, ask some questions, and make a judgment. If the case is close enough you go to the IRS for a determination letter.

Let's suppose you decide the mortgage company is a service organization. That isn't the end of the matter. We also need to decide that for the title company. Surely there is an investment in computers and records, but once again you look at the overall situation.

Now, pretend for a moment that both are service organizations. Next we ask if they are incorporated. If so, then they cannot be an A-Org type of affiliated service group, because of the professional service corporation exemption in the proposed regulations. In any event, they wouldn't be a B-Org type of affiliated service group because neither organization provides employee services to the other.

So you have a lot of different issues, all of which have to line up properly before you find an affiliated service group exists. These issues are discussed in more detail in Chapter 13 of my book, Who's the Employer?.

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.