ALI-ABA Course of Study Fundamentals of Employee Benefits Law March 5-7, 2009 Orlando, Florida

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1 59 ALI-ABA Course of Study Fundamentals of Employee Benefits Law March 5-7, 2009 Orlando, Florida Controlled Group, Affiliated Service Group, and Leased Employee Rules By Cynthia A. Van Bogaert Boardman, Suhr, Curry & Field LLP Madison, Wisconsin

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3 61 CONTROLLED GROUP, AFFILIATED SERVICE GROUP, AND LEASED EMPLOYEE RULES By Cynthia A. Van Bogaert Boardman, Suhr, Curry & Field LLP I. Introduction. The IRS controlled group and affiliated service group rules provide the foundation for identifying whether two or more employers need to be grouped together and treated as one employer for many benefit plan purposes. For example, coverage testing under Internal Revenue Code of 1986 ("Code") Section 410(b) applies these rules for determining which employees should be tested together. When determining which workers to include as employees, Code Section 414(n) includes "leased employees." II. What terminology is used for employer groups? Under Form 5500, employers fall into the following general categories (IRS 2008 Instructions for Form 5500, available at (last visited January 2, 2009)): A. Single Employer (Other Than Multiple Employer). 1. According to the Form 5500 instructions, a "controlled group" generally is considered one employer for Form 5500 purposes. The instructions define a controlled group as a controlled group of corporations under Code Section 414(b), a group of trades or businesses under common control under Code Section 414(c), or an affiliated service group under Code Section 414(m). (The term "controlled group" is not always defined so broadly. Watch for the definition used in a specific context. This outline generally will use "controlled group" to refer only to Code Sections 414(b) and (c).) B. Multiple Employer. A multiple employer plan is a plan that is maintained by more than one employer. (Keep in mind that a controlled group is treated as one employer.) Multiple employer plans can be collectively bargained and collectively funded, but if covered by PBGC termination insurance, must have properly elected before September 27, 1981, not to be treated as a multiemployer plan under Code Section 414(f)(5) or Employee Retirement Income Security Act of 1974, as amended ("ERISA"), Pub. L. No , Sections 3(37)(E) and 4001(a)(3) (1974). (Note that the Pension Protection Act of 2006, Pub. L. No (2006), added ERISA Section 3(37)(G) regarding multiemployer plan elections. Modifications to the 2006 changes were made by the U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007, Pub. L. No (2007).) If the employers maintaining a plan are members of the same controlled group, they are considered together as a single employer and the plan is not a multiple employer plan. C. Multiemployer. A plan is a multiemployer plan if: 1

4 62 1. More than one employer is required to contribute (keep in mind that a controlled group is treated as one employer); 2. The plan is maintained pursuant to one or more collective bargaining agreements between one or more employee organizations and more than one employer; and 3. There has been no election not to be treated as a multiemployer plan (see II.B, above). D. The IRS has indicated that "...there are still a significant number of plan sponsors who indicate they are a Multiemployer when they probably are not. In most of the instances, the errors come from filers who are Controlled Groups or Affiliated Service Groups that have a number of employers in their group, but are required to be treated as a single employer for tax return filing purposes...form 5500 filers indicating that they are a Multiemployer in error are generally from very specific industries: $ Health Care and Social Services Industry $ Professional, Scientific, and Technical Services Industry, especially Legal Services; Accounting; and Architectural, Engineering, and Related Services $ Banking, Insurance, and Securities/Financial Investments areas, especially the Finance and Insurance Industry $ Retail Industry, especially Car Dealers $ 'Other Service' Industry, particularly Funeral Homes" IRS Employee Plans News, Vol. 8, Summer 2008, available at irs-tege/sum08.pdf#page=8 (last visited January 21, 2009). VIII. When are the controlled group and affiliated service group rules applied? Before jumping into the definitions, it is helpful to know when to watch for the controlled group and affiliated service group concepts. A. The concept of controlled groups will come up in many different testing contexts, such as coverage testing under Code Section 410(b). The Code Section 410(b) test looks at whether an employer has covered "enough" non-highly compensated employees, but the test starts by examining whether you have included all of the required employers. Here are some of the areas that may be affected by the controlled group rules under Code Sections 414(b) and 414(c): 1. Code Section 410(b) (coverage testing); 2. ADP/ACP nondiscrimination testing under Code Sections 401(k) and 401(m); 3. Code Section 401 (qualified retirement plans); 4. Code Section 408(k) (simplified employee pension); 5. Code Section 408(p) (simple retirement accounts); 6. Code Section 410 (minimum participation); 7. Code Section 411 (minimum vesting); 8. Code Section 415 (annual addition limit) (see Code Section 415(h)) (for purposes of applying Code Sections 414(b) and (c) to Code Section 415, the 2

5 63 phrase "more than 50%" is substituted for the phrase "at least 80%" each place it appears in Code Section 1563(a)(1)); and 9. Code Section 416 (top-heavy limitation). B. Except to the extent otherwise provided in regulations, all employees of the members of an affiliated service group must be treated as employed by a single employer. Code Section 414(m) lists the following areas that are affected: 1. Code Section 401(a)(3) (minimum coverage under Code Section 410(b)); 2. Code Section 401(a)(4) (nondiscrimination); 3. Code Section 401(a)(7) (minimum vesting); 4. Code Section 401(a)(16) (annual addition limit); 5. Code Section 401(a)(17) (compensation limit); 6. Code Section 401(a)(26) (participation limit); 7. Code Section 408(k) (simplified employee pension); 8. Code Section 408(p) (simple retirement accounts); 9. Code Section 410 (minimum participation); 10. Code Section 411(minimum vesting); 11. Code Section 415 (annual addition limit); and 12. Code Section 416 (top-heavy limitation). C. Code Section 414(t) gives a list of sections for which both the controlled group and affiliated service group rules apply. (Code Section 414(t) also provides that Code Section 414(o) will apply): 1. Code Section 79 (group term life insurance); 2. Code Section 106 (health coverage); 3. Code Section 117(d) (qualified tuition reduction); 4. Code Section 120 (group legal services); 5. Code Section 125 (cafeteria plan); 6. Code Section 127 (educational assistance); 7. Code Section 129 (dependent care assistance); 8. Code Section 132 (fringe benefits); 9. Code Section 137 (adoption assistance); 10. Code Section 274(j) (employee achievement awards); 11. Code Section 505 (VEBA nondiscrimination testing); and 12. Code Section 4980B (COBRA). D. Code Section 414(o) provides for rules that may be implemented to prevent the avoidance of Code Section 414(m)(4) or 414(n)(3), inter alia through the use of separate organizations, employee leasing, or other arrangements. See also Prop. Treas. Reg. Section 1.414(o) History of Code Section 414(o). Code Section 414(o) was added by the Tax Reform Act of 1984, Pub. L. No , Section 526(d)(1) (1984) effective as of July 18, E. For funding implications, see Code Sections 414(b), 404(a), and 412. F. Code Section 414(b) (or (c) or (m)) may be incorporated into another section. For example: 3

ALI-ABA Course of Study Fundamentals of Employee Benefits Law March 5-7, 2009 Orlando, Florida TABLE OF CONTENTS

ALI-ABA Course of Study Fundamentals of Employee Benefits Law March 5-7, 2009 Orlando, Florida PROGRAM FACULTY PARTICIPANTS FACULTY BIOGRAPHIES STUDY MATERIALS TABLE OF CONTENTS 1. Overview of ERISA s