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Who's the Employer?

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

Related Employer Definition

(Posted October 13, 2011)

Question 301: What is the definition of a "related employer"?

Answer: Like so many terms, the definition depends on the context. Why are you asking?

I'm going to be bold enough to assume that you are asking in the context of this column, which deals with retirement plans. When I use the phrase "related employer," or say "these employers are related" when talking about qualified retirement plans, I am referring to businesses that are treated as a single employer under the law. This includes:

Members of a controlled group of corporations under Code �414(b);
Members of a group of trades or businesses under common control under Code �414(c); and
Members of an affiliated service group under Code �414(m), which can include an A-Org relationship, a B-Org relationship, or a management function group.

If two businesses fall under any of these categories, then most retirement plan rules treat them as a single business. Suppose, for example, that companies A and B are related. A sponsors a qualified plan for its employees. The employees of B don't participate. The fact that A and B are related means that when A tests the plan to make sure it satisfies the Code's coverage and nondiscrimination requirements, it treats the employees of B just like they were on A's payroll. Depending on the plan type, A may be able to exclude them, but A must at least count them in determining if the plan passes.

The same rules apply to other issues. Suppose A and B (still related) each sponsors a profit sharing plan and each contributes $49,000 to Oscar (who owns both companies). If A and B were not related, that would be just fine (better than fine, in fact, if you're Oscar). But since A and B are related, the law treats them as one employer. One employer cannot provide, under any and all defined contribution plans it sponsors put together, more than $49,000 of employer contributions to an employee during 2011.

Technically, there's one other way to be a related employer. The IRS has authority to write rules under Code �414(o) to make two businesses related. There are proposed regulations that have been sitting on the books for over 20 years, and the IRS has never finalized them. Until they are finalized, they have no effect.

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.