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Controlled Groups and Welfare Benefit Plans
(Posted June 29, 2006)
Question 284: Do the controlled group and common control rules only apply to retirement plans? What about medical plans? For example, a husband and wife own both an S corp and a C corp; the C corp wants to offer only its employees (husband and wife) a medical plan. Is this allowed under the Internal Revenue Code?
Answer: The answer depends on the particular kind of health or welfare benefit plan. Let me explain, with references to the 4th edition of my book, Who's the Employer?. (Subscribers can click to view online the text of these references.)
The controlled group and affiliated service group rules do apply for purposes of many welfare benefit plans [Q 10:34]: self-insured medical reimbursement plans under Code 105(h), insured health plans under Code 106, and cafeteria plans under Code 125, for example. Because the C corp and S corp in your example comprise a controlled group, all of the corporations' employees are deemed to have a single employer for purposes of applying the coverage rules of those Code sections.
However, as in all applications of the controlled group rules, the question of whether the rules apply is simply a prelude to the question, "So what?" ... For example, in your situation, the C corp would not necessarily have to include the S corp in its retirement plan. Rather, it would have to count the employees of the S corp in determining whether it passes the Code's minimum coverage requirement. [Q 10:4.] In your example, if there are non-highly compensated eployees in the S corp, then the C corp's plan would have to cover at least some of them in order to pass coverage. By contrast, if the plan is a SIMPLE IRA [Q 24:4] or a SEP [Q 24:1], it would have to cover all the eligible employees of the S corp.
Turning to your example of a medical plan, the rules of Code 106 for insured medical plans do not contain any nondiscrimination rules. In other words, an employer legally can choose to provide health insurance for the owners only, without covering any of the other employees.
By contrast, the self-insured medical reimbursement rules of Code 105(h) and the cafeteria plan rules of Code 125 provide detailed nondiscrimination tests. The C corp would have to take the employees of the S corp into account in applying those rules.
Welfare plans have a remarkably inconsistent set of nondiscrimination rules. It is critical to apply the right rules to the particular type of welfare plan.
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