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Answers are provided by S. Derrin Watson, JD, APM
What Can and Cannot Be Done With an Affiliated Service Group
(Posted April 20, 2012)
Question 311: Three individuals are the owners of a medical company (LLC). Each owner has his own PLLC, which is an S-Corporation. The medical company has 4 employees. Can any one of the PLLCs sponsor a qualified plan that is not a prototype and that does not include the employees of the affiliated service group?
Answer: Yes, and no. Let's break this up into bite-sized pieces.
- Is the medical company (LLC) and each PLLC an affiliated service group? It surely sounds like it. All of them are service organizations. The PLLCs each are deemed to own an interest in the LLC (thanks to attribution from the PLLC shareholder). The PLLCs likely regularly perform services for the LLC or are regularly associated with it in performing services for the public. Those are all the element of an affiliated service group.
- Can an affiliated service group member set up its own plan? Sure. What do the ASG rules do? They treat the ASG members as though they were a single employer. So pretend there is only one company here: the LLC, which has 4 rank-and-file employees and which would have the 3 doctor-owners. Could the LLC legally set up a plan covering some employees and not others? Sure. You can even do it on a nonstandardized prototype. The plan just has to pass the minimum coverage test. And that brings us to our final question.
- If a PLLC were to set up a plan covering its shareholder, and nobody else, would that plan pass the minimum coverage test on its own? Not a chance. The plan would cover 1 out of 3 HCEs and 0 out of 4 NHCEs, a pretty obvious FAIL. But suppose the LLC were to maintain a plan covering the 4 employees. Now a PLLC could set up a plan covering its shareholder and permissively aggregate it with the LLC plan. Of course, if one takes that approach, the plan must pass the minimum coverage test and the nondiscrimination test on an aggregated basis. The two plans would need to have the same plan year and use same testing method.
The new 6th edition of Who's the Employer addresses these topics.
- For affiliated service groups, see Chapter 13.
- For consequences of ASG status, see Chapter 10.
- For coverage testing, including permissive aggregation, see Chapter 23.
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