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Who's the Employer?

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

Professional Service Corporation Exemption to the Rescue

(Posted November 15, 2002)

Question 238: X owns 100% of stock in his S corporation (Corp A). It is a service organization that jointly provides services to clients with a C corporation (Corp B), another service organization. Neither is a Professional Service Corporation. X's wife is a 33% owner in Corp B. Can I assume this an affiliated service group due to the attribution rules? If so, can each corporation have its own retirement plan, provide the same level of contributions to each corporation's employees and view both companies employees as one group for non-discrimination testing, or must both corporations adopt one plan and use one trust?

Answer: I do not believe this is an A-Org style affiliated service group, and you have not given me any facts that would make me think it is a B-Org.

Under the proposed 414(m) regulations, on which taxpayers may rely, the FSO of an A-Org must either be unincorporated or be a professional service corporation (PSC). Both A and B are incorporated and neither is a PSC, so neither can be an FSO. Without an FSO, one cannot have an A-Org relationship.

To have a B-Org, one organization would need to provide services to the other. You have not indicated that this is the case.

In short, based on the facts you have given me, nothing leads me to believe an ASG exists.

But let's turn to your second question. If an ASG exists, all employees of all ASG members are deemed to be employed by a single employer. Can a single employer have multiple plans, each covering different groups of people? Of course they can, so long as the plans can pass coverage. Can a single employer provide different levels of benefits in those plans? If they can pass coverage without aggregating the plans, then yes, they can. An ASG can do just about anything a single employer can do. There is no reason to hamstring the businesses by forcing them to have a single plan or to have identical plans, if the facts will permit something else.

For example, suppose Corp A and Corp B each have 5 HCEs and 40 NHCEs (with no overlapping employees). Corp A wants a safe harbor 401(k). Corp B wants a pedal-to-the-metal defined benefit plan. Will it work? Sure. Each plan will cover half the HCEs and half the NHCEs. Each plan will pass IRC 410(b) without aggregating the other plan. Corp B's plan also will pass IRC 401(a)(26).

I discuss ASGs in chapter 13 of my book, Who's the Employer. Consequences of affiliated status are discussed in Chapter 10, with numerous examples.

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.