Who's the Employer?

Answer: Yes. Let's trace this through.

Because United and American are an affiliated service group (ASG), their employees are deemed to have a single employer. The ASG rules expressly apply this single employer status to the provisions of IRC 416, which has the definition of 5% owner used in the HCE rules. Moreover, IRC 414(q)(7) says that you apply the ASG rules before you determine HCE status. But IRC 416(i)(1)(C) says that you do not apply the ASG rules in determining ownership of the employer. Huh?

Here's what this boils down to: if I am an employee of an ASG member, and I am a 5% owner of any ASG member, then I am a key employee with respect to the single employer resulting from the affiliated service group.

Let's apply that awkward sentence to this situation and hopefully it will be more clear.

Anne is deemed to own her father's stock in American Lists by virtue of the IRC 318 attribution rules. Thus she is a 5% owner of one member of the United/American ASG. She does not need to be a 5% owner of every member of the ASG or of the group as a whole. (For example, suppose United stock is worth $1,000,000 and American stock is worth $10,000. Anne's 40% of American gives her less than 0.4% of the total. Nonetheless, she owns more than 5% of American and hence is a 5% owner of the affiliated service group.)

Moreover, Anne is an employee of the United/American ASG. It does not matter that she is not an employee of the entity in which she is deemed to own stock. She can own stock in one ASG member and be an employee in another and still be an HCE of the combined employer.

There are additional examples of this in Chapter 10 of my book Who's the Employer.

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