Question 308: Enrique and Carmen each has a 100%-owned Sub-S corporation. A limited liability company (LLC) is owned 90% by Enrique and 10% by Carmen. Each receives guaranteed payments (no salary) from the LLC. Each Sub-S corporation also has a few part-time employees who are also paid from the LLC. Are all three (the two corporations and the LLC) a controlled group? An affiliated service group?
Answer: Short answer: Enrique's Sub-S corporation (I'll call it "Enrique, Inc.") and the LLC are under common control.
Long Answer: This question demonstrates the importance of being familiar with the various related employer rules. Even if you have difficulty analyzing a situation, you know what facts to collect, and how to rule things out.
Let's start with the final question: Are these entities an affiliated service group? Maybe, but maybe not. We don't begin to have the facts to answer that question.
Affiliated service group status is based on much more than just common ownership.
I discuss ASGs at length in Chapter 13 of my book, Who's the Employer.
- Suppose Enrique and Carmen are doctors and the LLC is a clinic which employs the staff members. Then all three are an affiliated service group.
- Suppose Enrique runs a hardware store, Carmen runs a grocery store, and the LLC sells hard candy. Then they aren't an ASG.
So let's turn to the other half of the question, controlled groups, or (in this case because one of the entities is unincorporated) common control. The analysis here is straightforward. Enrique owns at least 80% of Enrique, Inc. and at least 80% of the LLC. That means Enrique, Inc. and the LLC are under common control. Carmen owns only 10% of the LLC. Unless there is attribution between Enrique and Carmen, 10% isn't going to create common control. So Carmen's Sub-S corporation is totally separate based on the limited facts we have.
What does this mean for Enrique? It means Enrique, Inc. and the LLC are one employer for the retirement plan rules. Can Enrique, Inc. set up a qualified plan without covering the LLC employees? Sure, if the plan can pass the minimum coverage test. But the plan will need to count the LLC's employees in the minimum coverage test. If the plan is cross-tested, the LLC's employees also will enter into the general nondiscrimination test. The good news is that, assuming Enrique's services are a material income-producing factor for the LLC, the guaranteed payments can give rise to earned income, which counts as compensation for plan purposes, assuming the LLC co-sponsors the plan.
The common control rules are not hidden mysteries. They are really a matter of simple math, once you understand them. A fundamental understanding of those rules must be in the toolbox of any experienced, knowledgeable retirement plan analyst. If you need help in understanding them, try my book. We just published the 6th edition and it is on sale now.