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Who's the Employer?

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

Does a plan automatically cover employees of an affiliated employer?

(Posted January 18, 2001)

Question 73: A and B are independent medical corporations, each with only one employee. They join to form a 50/50 partnership consisting of a hospital practice and a private office practice. The employees of the partnership work solely in the office practice. An outside billing service handles the hospital practice. Both A and B contnrol the employees equally. Each of the two corporations provides services to the partnership.

During dissolution of the partnership, it is found that corporation A had a pension plan funded only for its sole employee. The partnership employees maintain that they are part of an affiliated serice and should have been included in the pension plan. Corporation A says no. Corporation B believes the employees are correct and the partnership has the liability of funding a pension plan for the employees. Who's right?

Answer: Let's start with the question of whether this is an affiliated service group. The answer is yes. All three businesses are in the health profession, so all are service organizations. The corporations each are owners of the partnership and each perform services for the partnership. Hence the partnership is an FSO and each company is an A-Org in a classic affiliated service group.

Does that mean that the employees of the partnership have a right to be included in A's plan? Not necessarily.

First, check the language of A's plan. Does it automatically include employees of affiliated companies? Some plans do, particularly standardized prototype plans. Many plans do not. If there is such a provision, then the employees are right and they are entitled to coverage. If there is no such a provision, then A is right and has no duty to cover these folks.

But let's take that a step further. Suppose there is no plan language requiring their inclusion. What does that mean? Because you have an affiliated service group, all employees are deeemed to be employed by a single employer. Hence, in testing the plan to see if it satisfies the qualification requirements of the Code, we test it by looking at all the employees of all three entities.

Depending on the facts, it is possible that the plan may pass the coverage tests of Code section 410(b) without covering the employees of B and the partnership. But it might not.

If the plan fails the qualification tests after considering the entire group, then A has a choice to make. It can accept the consequences of disqualification, or it can go through the IRS correction programs. Part of the price of those correction programs will almost undoubtedly be including some or all of the employees from the other businesses. So, what they don't get through the front door of plan language, they may get through the back door of IRS correction procedures.

In any event, if you are at this point, you need the advice of a skilled pension lawyer to evaluate your options.

Incidentally, there is no legal obligation for the partnership to do anything at all. One partner can't force a partnership to adopt a plan just because the partner has adopted the plan. However, the partnership may choose to become a cosponsor of the plan as a part of correction procedures. That would be the choice of both partners, not just A.

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.