Who's the Employer?

Answer: This excellent question is important for several reasons besides the concerns of credit unions:

• It illustrates well that the new common control regulations apply to all types of tax exempt organizations. They are not limited to 501(c)(3) charities. Credit unions are exempt under Code §501(c)(1) or (c)(14).
  
• It also illustrates that the new regulations apply to qualified plans as well as 403(b) plans, even though they were issued as part of the 403(b) regulation package.
  
• It is timely because the new regulations go into effect for plan years beginning after 2008.
  
• It is also timely because I discuss those new regulations at length in my recently issued 5th edition of Who’s the Employer. (More on that later.)
  
• Finally, it illustrates an interesting peculiarity of the regulations.

1. In the case of an organization that is exempt from tax under section 501(a) (an exempt organization) whose employees participate in a plan, the employer with respect to that plan includes the exempt organization whose employees participate in the plan and any other organization that is under common control with that exempt organization.
   
2. For this purpose, common control exists between an exempt organization and another organization if at least 80 percent of the directors or trustees of one organization are either representatives of, or directly or indirectly controlled by, the other organization.
   
3. A trustee or director is treated as a representative of another exempt organization if he or she also is a trustee, director, agent, or employee of the other exempt organization.
   
4. A trustee or director is controlled by another organization if the other organization has the general power to remove such trustee or director and designate a new trustee or director.
   
5. Whether a person has the power to remove or designate a trustee or director is based on facts and circumstances.
   
6. To illustrate the rules of this paragraph (b), if exempt organization A has the power to appoint at least 80 percent of the trustees of exempt organization B (which is the owner of the outstanding shares of corporation C, which is not an exempt organization) and to control at least 80 percent of the directors of exempt organization D, then, under this paragraph (b) and § 1.414(b)-1, entities A, B, C, and D are treated as the same employer with respect to any plan maintained by A, B, C, or D for purposes of the sections referenced in section 414(b), (c), (m), (o), and (t).

B. Alternatively, the Treasury meant what they said. An exempt organization can be under common control with any other organization if one of the two organizations controls at least 80% of the directors of the organization. If (and only if) you are dealing with two exempt organizations, you expand the common control situations to include directors of one organization who are “representatives of” or “controlled by” the other organization. If you can’t tell, I favor interpretation B. I am reading the words on the page and assuming that the Treasury meant what it said.
 
What does this mean for a credit union plan? Suppose a taxable organization sponsors a credit union for its employees. As the question describes, employees of the sponsor serve as the board of directors of the credit union. However, the sponsoring organization does not, itself, have the power to remove or appoint directors. Therefore, the sponsoring organization does not “control” the credit union directors. Since sentence 4 does not apply on the facts, we are left with sentence 3.  This gives us the following picture

• If the sponsoring organization is a governmental unit, the new common control rules do not apply because of the preamble.
  
• If the sponsoring organization is an exempt organization, then sentence 3 applies. Since all directors of the credit union would be “representatives of” the sponsor (by virtue of their status as employees), the sponsor and the credit union would be under common control. I see no way around this.
  
• If the sponsoring organization is a taxable organization, then sentence 4 does not apply. The sponsor and the credit union would not be under common control.

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