Affiliated Service Groups

Transcription

1 Affiliated Service Groups Ilene H. Ferenczy, Esq., APA, CPC, Managing Partner, Ferenczy + Paul LLP Ilene H. Ferenczy, Esq., APA, CPC, Managing Partner, Ferenczy + Paul LLP Ilene Ferenczy is the managing member of Ferenczy + Paul LLP with offices in Atlanta, GA, Sacramento, CA, and Knoxville, TN. Ilene particularly focuses her practice on qualified retirement plans, benefits issues in mergers and acquisitions, and advising third-party administrators of employee benefit programs on technical and practice issues. Ilene became an attorney after more than ten years as a thirdparty administrator, and she brings a unique and practical approach to her advice to clients.

2 Ilene H. Ferenczy, Esq., APA, CPC, Managing Partner, Ferenczy + Paul LLP She is a member of the State Bars of Georgia and California, and holds designations as a Certified Pension Consultant from the American Society of Pension Professionals and Actuaries ("ASPPA ) and Accredited Pension Administrator from the National Institute of Pension Administrators. She is a nationally known speaker on benefits issues and has authored more than 70 articles and five books. Ilene is the first female co-chair of ASPPA s Government Affairs Committee, was the 2007 recipient of ASPPA s Educator of the Year Award, and is a Fellow in the American College of Employee Benefits Counsel. Why Do We Have ASGs? We have the controlled group rules So what do we need ASGs for?

3 Controlled Group Rules Could Be Abused G Med Corp. Dr. G 50% 50% G+K Partnership Dr. K 100% 100% K Med Corp. No controlled group, because neither owns anything in the other s medical corporations Dr. G and Dr. K can put whatever benefits they want in their own corps without considering the partnership (which employs all the NHCEs) 5 IRS Called Foul Took case to tax court Tax court said: no controlled group IRS went to Congress for help Result: Affiliated Service Group rules 6

4 Affiliated Service Groups Three kinds: A-organization B-organization M(anagement)-organization 7 One Element of both A-Orgs and B- Orgs: First Service Organization (FSO) Service organization: capital is not a material incomeproducing factor Certain fields are deemed by the regulations to be service organizations: health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or insurance If corporation, must be professional service corporation: Organized under state law for the principal purpose of providing professional services and has at least one shareholder who is licensed or otherwise legally authorized to render these services Professional services include: accountants, actuaries, architects, attorneys, chiropodists, chiropractors, medical doctors, dentists, professional engineers, optometrists, osteopaths, podiatrists, psychologists, and veterinarians 8

5 FSO: Service Organization What is consulting for purposes of determining whether the entity is a service organization? Open to interpretation Section 448 of the Code: providing advice and counsel, but not sales or brokerage Key point to analysis: how is the person compensated? If compensation is based on consummation of deals, likely considered to be sales/brokerage and not consulting 9 FSO: Service Organization What is consulting for purposes of determining whether the entity is a service organization? Examples from Regulations to Section 448: Economic forecasting and analysis or business analysis, with recommendations based on the analysis: consulting Company analyzes clients IT needs and makes recommendations regarding design and implementation of IT services (but no computer sales): consulting Financial planning - analysis of financial situation, coupled with recommendations for financial activities (including creating a budget and investment strategies): consulting Investment recommendations, coupled with fulfilling orders for investment purchase (and compensation is contingent on the sales/purchases of the investments): not consulting Employment agency that makes hiring recommendations to employers, but is paid based on placing people: not consulting 10

6 FSO: Service Organization What is consulting for purposes of determining whether the entity is a service organization? Examples from Regulations to Section 448 (cont d): Advertising agency helps clients place advertisements for goods and services, and also analyzes trends in the industry. Agency is paid based on ads placed: not consulting Insurance sales/brokerage paid on commission from sold products: not consulting 11 What Is a Service Organization? Banking and financial institutions: Capital is a material income-producing factor, so not a service organization Companies with significant inventory, equipment, plant, machinery: capital is a material income-producing factor, so not a service organization Companies whose income is primarily from fees or commissions for personal services: capital is not a material income-producing factor, so is a service organization

7 What Is a Service Organization? Other Examples: Actuary: because it is a listed service in the regulations, capital is irrelevant: company is a service organization Professional athlete: not a listed service, but no real capital expenditure, so service organization Radiology group invests $1 million in imaging machine: while it is a material capital investment, radiology is medicine, which is a listed service: company is a service organization Author: invested in IT equipment and computer programs to facilitate publishing. Nonetheless, this is likely not to be a sufficient capital investment, so probably a service organization Veterinarian: although the office represented a significant capital investment, it is likely that the income of the entity comes primarily from the performance of personal services (and it may be considered to be a health-related field) A-Orgs

8 A-Org: Definition FSO must be owned at least partially by another organization ( A-organization ) Both FSO and A-organization must be service organizations A-organization either: Regularly performs services for the FSO or Is associated with the FSO in performing services for third parties 15 A-Org Graphic Ownership Services A- Organization Third Parties FSO

9 Classic A-Org A law firm is made up of five lawyers, each of whom are employed by their own professional corporation, and a partnership (owned 20% by each lawyer) that employs the law firm staff and does all billing Law firm partnership is the FSO Professional corps are A-orgs They are associated with each other in performing services for clients A B C D E Partnership (FSO) Third Parties 17 B-Orgs

10 B-Org FSO, plus B-organization (not necessarily a service organization): Derives a significant part of its income from providing services for the FSO (or for A-organizations associated with the FSO) Services are of a type historically performed by employees Owned at least 10% by people who are HCEs in the FSO or the related A-organization 19 FSO for B-Org Purposes Can be any service organization Corporations do not have to be professional service organizations to be FSOs

11 B-Org Graphic 10%+ Ownership Services Employment HCE FSO B- Organization Significant Portion of Business? Two tests: Service Receipts Percentage >= 5% SRP = Gross Receipts of the potential B-organization from performing services for the FSO/A-organizations Total Gross Receipts of the potential B-organization from performing services Total receipts percentage >= 10% TRP = Gross Receipts of the potential B-organization from performing services for the FSO/A-organizations Total Gross Receipts of the potential B-organization

12 Services Historically Performed by Employees Per regulations, based on whether it was unusual for employees in that service field to perform those services as of December 13, 1980 (the date that the proposed regulations were issued) Note: based on the service field and not necessarily on those companies What to do with industries that didn t exist in 1980? Classic B-Org Norris owns 15% of an accounting firm and 20% of Corporation SC, which provides secretarial and clerical services to the accounting firm Accounting firm is FSO Corporation SC is the B-organization Provides services historically performed by employees Because Norris owns at least 15% of the accounting firm, he is, by definition, an HCE of the firm. He owns 20% (i.e., 10%+) of the B-organization (Corp. SC) 24

13 M(anagement)-Orgs Management-Org M-Organization: An organization, the principal business of which is the performance of management services on a regular and continuing basis for one client and/or organizations related to that client Service provider = management organization Can be any type of entity: corporation, partnership, LLC, LLP, sole proprietorship Client = recipient 26

14 What Is a Management Function? Not defined Likely: management-type tasks: hiring, firing, direction of employees in their activities, determination of company policies, identification of business objectives Outside corporate directors are not considered to be managers for this purpose Committee reports indicate that these functions would be performed by employees, partners, sole proprietors What Is Principal Business Not defined Possible interpretations More than 50% of efforts More than 50% of income

15 Example of Management-Org John Bigboss is the CEO of Gigantic Enterprises, Inc. Gigantic wants to provide John with the highest possible qualified pension John creates his own corporation, JB Management Corp. JB enters into a contract to provide CEO services to Gigantic Enterprises, Inc. 29 Example of Management-Org Because there is no cross-ownership, there is no ASG right? Wrong it is a management-organization Does this apply to a big consulting company that provides rent-a-cfo to a bunch of companies? No, because no one client represents the principal business of the consulting company 30

16 IRS Determination You may request of the IRS a determination of whether there is an ASG Use Form 5300 Does not cause the plan to be reviewed as an individually designed plan (i.e., do not need to update plan for current cumulative list of changes) Appears that, if it is not submitted during the plan s remedial amendment cycle, it will processed as an off-cycle submission 31 Include: IRS Determination Identification of the businesses at issue Description of the nature of the business of all the businesses that potentially make up the ASG (including whether it is a service organization or a management-organization) The owners of the various companies Description of the services performed among the businesses or for third parties; gross and service receipts test, whether services were historically performed by employees If possible M-Org: Description of management functions Usual for those functions to be performed by employees What part of the business is the performance of management functions (including percentage of company s receipts from those services) Copy of any prior ruling or determination letter on the issue (plus originally provided facts and changes to such facts) 32

17 Ownership Attribution ASG Attribution of Ownership Based on IRC 318(a) Family attribution to: spouse, children, parents, grandchild No attribution among siblings No attribution from grandparent to grandchild 34

18 Example of Family Attribution Family relationships: Mom (400 shares) and Dad (500 shares) 2 kids: Sister (300 share) and Brother (200 shares) 1 grandkid: Sister s child (100 shares) Attributed ownership: Mom: All 1500 shares (spousal, child, grandchild) Dad: All 1500 shares (spousal, child, grandchild) Sister: 1300 shares (parent, child) Brother: 1100 shares (parent, child note, no attribution from niece or nephew) Grandkid: 400 shares (parent note, no attribution from grandparents) From Who s the Employer (6 th Edition), by S. Derrin Watson (Q&A ) ASG Attribution of Ownership From entity to owners: Unincorporated organization s ownership of another entity is attributed proportionately to organization s owners Corporation s ownership of another entity is attributed pro rata to 50%+ shareholders From owners to entity: Unincorporated organization, s-corporation are deemed to own that which is owned by the partners/shareholders C-corporations are deemed to own that which is owned by 50%+ shareholders 36

19 Options ASG Attribution of Ownership Owners of options issued by either a corporation or its shareholders that are not conditional in any way except by the lapse of time or the payment of the purchase price are considered to own the underlying stock E.g., Bob has an option to buy 200 shares of ABC stock at $10 per share on or before January 1, Bob is considered to own 200 shares of ABC stock for ASG purposes E.g., Sally gives Bob a right of first refusal on her 100 shares of ABC stock. (This means that Sally must offer the stock to Bob before she sells to a third party.) Because Bob s rights are contingent on Sally deciding to sell (a condition outside Bob s control), this is not an option for attribution of stock purposes (i.e., Bob is not deemed to own the 100 shares of ABC stock) 37 Trusts ASG Attribution of Ownership No attribution of ownership from qualified plan trust to participants/beneficiaries Attribution from trust to beneficiary in proportion to actuarial interest of the beneficiary Attribution from trust to grantor Estates Attribution from estate to beneficiary in proportion to beneficial interest (whatever that means) 38

20 Analyzing ASGs Steps to Analyze Get all necessary details up front Making assumptions in this area is deadly Details needed All companies that could be involved Ownership of all companies Relationships between owners, including options, trusts Types of businesses Services provided among the companies Services provided by the companies jointly for third parties Are those services of a type historically provided by employees in that industry? Service receipts and gross receipts percentages

21 Steps to Analyze Apply the rules One type of ASG at a time One step at a time What company is the potential FSO? Does it meet the requirements for an FSO (e.g., if a corporation, is it a PSC for A-Org purposes?) What company(s) is the potential A-organization, B-organization, management service recipient If ownership is needed, is there: Direct ownership? Attributed ownership? Be careful that services and ownership flow in the right direction (i.e., that the correct entities own or provide services to the other entity) Examine from all directions Do not try to shortcut the process! Steps to Analyze If there are doubts about how the rules are applied, give the client the possible interpretations and the risks of being aggressive, and let the client decide how risky they want to be Consider whether the client needs legal advice to make a proper decision Consider whether to apply to the IRS for a ruling

22 QUESTIONS? 14 Contact Information ILENE H. FERENCZY Ferenczy + Paul LLP 2200 Century Parkway, Ste. 560 Atlanta, Georgia (678) ilene@ferenczypaul.com 44