Control Group Issue for Tax Exempt Organizations

Organization A is a tax-exempt organization under Section 501(c)(3) and maintains a 401(k) Plan.  CEO of Organization A is a highly compensated employee for Plan Year 2020, which causes the Plan to fail minimum coverage testing.  CEO wishes to lower his compensation so that he is no longer a HCE for future years, and instead receive the same amount of compensation from Organization B, which is also a tax-exempt organization.  The two tax-exempt organizations are not under common control under the rules of 1.414(c)-5(b), and thus do not appear to be related employers. (80% of directors of one organizations are not representatives of, or controlled by, the other organization).

If CEO of Organization A wishes to lower his compensation from Organization A, and receive that same amount from Organization B to make up for that (in an attempt to keep his compensation the same, but avoid violation of minimum coverage rules for Plan maintained by Organization A), does this violate the anti-abuse rule of Section 1.414(c)-5(f)?  That rule states as follows:

"Anti-abuse rule.—

In any case in which the Commissioner determines that the structure of one or more exempt organizations (which may include an exempt organization and an entity that is not exempt from income tax) or the positions taken by those organizations has the effect of avoiding or evading any requirements imposed under section 401(a), 403(b), or 457(b), or any applicable section (as defined in section 414(t)), or any other provision for which section 414(c) applies, the Commissioner may treat an entity as under common control with the exempt organization."

Not finding any guidance on the subject.  Does not appear I can get around the Anti-Abuse rule, but thought I would see if anyone had seen anything like this before.

My understanding of the anti-abuse provision is that it exists to give the IRS the power to disqualify plans which are discovered to be abusive under audit, even if the situation does not directly violate the letter of any law or regulation. In other words, it is usually impossible to determine if you are violating the rule, until the IRS tells you that you have violated it.

The sole example in 1.414(c)-5(g) that talks about the anti-abuse provision describes a situation in which one organization has the power to select the slate of nominees from which the directors of another organization will be chosen. In your situation, the directors of one organization apparently have the authority to set the compensation for employees of another organization. I do not know if that rises to the same level as the case in the example.

If you want a more authoritative opinion, I recommend you contact Derrin Watson. He (literally) wrote the book on this topic.

If organization B isn't controlled by the same board as organization A, why would the board of org B agree to do this? And aren't they violating their duty to org B?

David Olive, I agree with both C.B. Zeller and Bill Presson. The mystery is that, per you, the entities are not commonly controlled under the reg, yet the executive is confident that he can just pull salary from either entity, and that entity will agree to do it.

I failed to mention that while the organizations do not fall under common control under the tests in 1.414(c)-5(b), the organizations are related.  Organization B is a foundation that provides fundraising for Organization A, a nonprofit entity that employs disabled people to provide services to local businesses.  They do have some board members that serve on both organizations (below 80%), and the executive for Organization A described above is a non-voting board member of Organization B.

Has anyone done an Affiliated Service Group analysis of this relationship.

28 minutes ago, David Olive said:

I failed to mention that while the organizations do not fall under common control under the tests in 1.414(c)-5(b), the organizations are related.  Organization B is a foundation that provides fundraising for Organization A, a nonprofit entity that employs disabled people to provide services to local businesses.  They do have some board members that serve on both organizations (below 80%), and the executive for Organization A described above is a non-voting board member of Organization B.

But let's still assume that they are legally unrelated for tax/retirement plan purposes. If I'm a board member on Org B and not on Org A, I would be very concerned.

16 hours ago, Bill Presson said:

But let's still assume that they are legally unrelated for tax/retirement plan purposes. If I'm a board member on Org B and not on Org A, I would be very concerned.

Isn't this similar to the relationship between a university and its foundation, which usually exists solely to raise funds for and financially support the university? Foundations will often provide supplemental pay or benefits to university leadership for various reasons, but generally not to avoid 410(b) failures. If that's the sole reason, I think there's a better chance of the IRS applying the anti-abuse rule, although the standard remains vague. 

13 hours ago, EBECatty said:

Isn't this similar to the relationship between a university and its foundation, which usually exists solely to raise funds for and financially support the university? Foundations will often provide supplemental pay or benefits to university leadership for various reasons, but generally not to avoid 410(b) failures. If that's the sole reason, I think there's a better chance of the IRS applying the anti-abuse rule, although the standard remains vague. 

Yes, very similar in that the foundation (Org  B)exists solely to raise funds for the operating entity (Org A).

Thanks EBE & David. That does make a difference to me. 

Thank you all.  This has been a good resource with there being such little guidance on this issue.