Controlled Group or Affiliated Service Group Determination
To qualify for tax deductions, retirement plans must meet IRS requirements. These rules emphasize the need for plans to provide lower-paid employees with retirement benefits that do not disproportionally favor higher-paid employees and business owners. Congress created laws that treat certain groups of entities as a single company for purposes of retirement plan coverage, seeking to prevent employers from circumventing those rules by having various entities. All employees of a combined group of entities must be considered together when measuring whether or not a plan passes the IRS coverage tests. The laws create what are commonly known as “controlled groups” (CG) and “affiliated service groups” (ASG).
By definition, a controlled group is a combination of entities where there is 80% or more overlapping ownership. This could be a parent-subsidiary relationship or simply a situation where common ownership is 80% among 5 or fewer individuals. It can be complicated to determine applicable ownership for each company, as there are rules that address ownership to and from certain family members. Stock or other ownership options are also ruled as ownership for the purposes of controlled group consideration. Business owners will commonly not consider all of their ownership and can run afoul of these regulations, leading to severe penalties.
An example of a control group would be Ms. Jones owning 100% of Company A with 5 employees and at the same time owning Company B with no employees. When she decided to open a 401(k) plan for Company B, she took no employees under consideration as there are none in Company B. However, as she owns more than 50% of Company A, the employees of Company A must be included for testing purposes and would need to be covered by the new 401(k) plan. Ms. Jones has violated the controlled group regulations by not giving all employees their fair share.
An affiliated service group’s determination is defined as two or more service companies with common ownership, regardless of size, that are associated together in providing services to others or that provide significant services to one another. Also, if a significant portion of a company’s business if providing management services to another company, they are also considered an affiliated service group. The most common professional companies that fall under this definition are medical, law, consulting, entertainment, or accounting practices organized as partnerships. While each professional may be separately incorporated, if the corporations are all partners in a firm with income flowing from the firm to the individual corporations, this would be considered an ASG.
For example, Attorney Key establishes his practice as KEY P.C. His corporation is partner in a larger law firm, ACME Corporation. Key P.C. is regularly associated with ACME Corporation in performing legal services for third parties. Together, KEY P.C. and ACME Corporation form an affiliated service group. Should ACME Corporation wish to establish a 401(k), they would need to take Attorney Key’s office employees into consideration for testing or they would violate IRS regulations for fair benefits.
Overlooking the presence of a controlled group or affiliated service group could result in failing to offering individuals required coverage or otherwise improperly excluding them from other employee benefits. All of these negligences can result in significant consequences. Wall Street Alliance Group can help you determine if your ownership situation falls under either the CG or ASG categories with the IRS to protect you and your business from making mistakes when establishing your 401(k) and preserve you from those penalties resulting from violations.
