Controlled Group Case Studies. Ilene H. Ferenczy, Esq., APA, CPC, Managing Partner, Ferenczy + Paul LLP

Transcription

1 Controlled Group Case Studies Ilene H. Ferenczy, Esq., APA, CPC, Managing Partner, Ferenczy + Paul LLP

2 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.

3 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.

4 Agenda Introduction Parent-Subsidiary CGs Brother-Sister CGs Combined CGs Attribution of Ownership Big Case Study

5 Introduction

6 Why Are There Controlled Group Rules? Congress intends that the benefits of qualified plans are to be available only if the plans cover a broad crosssection of employees and are nondiscriminatory The CG rules dissuade companies from trying to bypass these rules by using different company structures 6

7 Effect of CG Rules If two or more companies are part of a controlled group, they are treated as one company for benefits purposes for: Coverage (IRC 410(b)) Nondiscrimination (IRC 401(a)(4)) Benefits Limits (IRC 415) Compensation Limits (IRC 401(a)(17)) Service Crediting (IRC 410 and 411) Top-Heavy Rules (IRC 416) Deferral and Catch-up Limits (IRC 401(a)(30), 414(v)) 7

8 Types of Controlled Groups Parent-Subsidiary Deals with one company owning another Brother-Sister Deals with two or more companies being owned by the same people or entities Combined Groups Deals with entities that include some parent-subsidiaries and some brother-sisters 8

9 Parent-Subsidiary Controlled Groups

10 Parent-Subsidiary Controlled Group At least 80% Parent Company Subsidiary A parent-subsidiary group exists if one company (the parent ) owns at least 80% of another company (the subsidiary ) 10

11 Special Rule for IRC 415 For purposes of applying 415 limitations, the at least 80% ownership requirement becomes more than 50% Example: Mary owns 100% of M company and M company owns 70% of Z company. Each company sponsors a plan, and Mary (and only Mary) participates in both plans. M and Z are not a controlled group for most purposes, including coverage, eligibility, vesting because M doesn t own at least 80% of Z. BUT, M and Z are a parent-subsidiary controlled group for 415 purposes, because M owns more than 50% of Z. So, when Mary s maximum benefit/contribution amounts are determined, her benefits in both the M plan and the Z plan must be aggregated.

12 Brother-Sister Controlled Groups

13 Or, For the More Cynical Among You Brother-Sister Controlled Groups

14 Brother-Sister Controlled Group Deals with companies owned by the same other individuals, estates, or trusts Two-Part Test: 80% Common Control Test 50% Effective Control Test 14

15 Brother-Sister Controlled Group 80% Common Ownership: Five or fewer common owners own at least 80% of each company Common owners: Individuals Trusts Estates Note: not other businesses (those fall under parent-subsidiary rules) Ignore common owners who own no interest in one or more of the companies under consideration (but be careful ) Vogel Fertilizer decision 15

16 Brother-Sister Controlled Group: 80% Common Ownership Test Owner Company A Company B Jonathan 70% 30% Jared 30% 60% Zoe 0% 10% These three individuals own all of the two companies Zoe, however, has no ownership in Company A, so she is ignored for this test So, Jonathan and Jared together own 100% of Company A and 90% of Company B 80% common ownership test is met 16

17 Brother-Sister Controlled Group: 80% Common Ownership Test Owner Company A Company B Jonathan 70% 30% Jared 30% 10% Zoe 0% 60% These three individuals own all of the two companies Zoe, however, has no ownership in Company A, so she is ignored for this test So, Jonathan and Jared own 100% of Company A but only 40% of Company B 80% common ownership test is failed 17

18 Brother-Sister Controlled Group 50% Effective Control Test: The same five or fewer common owners from the 80% common ownership test have more than 50% ownership when only identical ownership is considered Identical ownership is the lowest ownership the individual has in any of the companies being considered 18

19 Brother-Sister Controlled Group: 80% Common Ownership Test Owner Company A Company B Identical Ownership Jonathan 70% 30% 30% Jared 30% 60% 30% Zoe 0% 10% 0% These three individuals own all of the two companies Jonathan s lowest ownership is 30% Jared s lowest ownership is 30% The total, 60%, is greater than 50% companies are a controlled group 19

20 Brother-Sister Controlled Group: 80% Common Ownership Test Owner Company A Company B Identical Ownership Jonathan 90% 30% 30% Jared 10% 60% 10% Zoe 0% 10% 0% These three individuals own all of the two companies Jonathan s lowest ownership is 30% Jared s lowest ownership is 10% The total, 40%, is not more than 50% - companies are not a controlled group 20

21 Another Example Corporation A Corporation B Identical Ownership Dylan 40% 30% 30% Maggie 20% 40% 20% Joan 35% 15% 15% Lewis 5% 0% n/a Shannon 0% 15% n/a Ownership of 5 or fewer (D, M, J) 95% 85% 65% Individuals with ownership in both companies control at least 80% (80% common control test passed) Same individuals have identical ownership of more than 50% (50% effective control test passed) 21

22 Be Careful When There Are More Than Two Companies Owner Company A Company B Company C Identical Ownership Gina 20% 10% 0% 0% Barbara 35% 40% 5% 5% Louise 35% 25% 60% 5% Erica 10% 25% 35% 10% Total 80% 90% 100% 20% Gina has no ownership in one of the companies, so she is ignored entirely The remaining 3 individuals own at least 80% of all companies (common control test is passed) But, the same 3 individuals do not own more than 50% when identical ownership is considered (50% effective ownership test is failed)

23 Be Careful When There Are More Than Two Companies Are we done? NO!! We must consider any sub-groupings of the various companies to determine if they represent a controlled group Possible CGs: A-B-C A-B A-C B-C

24 Be Careful When There Are More Than Two Companies Owner Company A Company B Company C Identical Ownership Gina 20% 10% 0% 10% Barbara 35% 40% 5% 35% Louise 35% 25% 60% 25% Erica 10% 25% 35% 10% Total 100% 100% 100% 80% Consider first just A and B 4 people control 100% of both companies Identical ownership total is 80% These two companies are a controlled group

25 Be Careful When There Are More Than Two Companies Owner Company A Company B Company C Identical Ownership Gina 20% 10% 0% 0% Barbara 35% 40% 5% 5% Louise 35% 25% 60% 35% Erica 10% 25% 35% 10% Total 80% 100% 100% 50% Now consider just A and C Ignore Gina (no ownership in Company C) 3 remaining people control at least 80% of both companies Identical ownership total is 50% - not more than 50% These two companies are not a controlled group

26 Be Careful When There Are More Than Two Companies Owner Company A Company B Company C Identical Ownership Gina 20% 10% 0% 0% Barbara 35% 40% 5% 5% Louise 35% 25% 60% 25% Erica 10% 25% 35% 25% Total 100% 90% 100% 55% Now consider just B and C We ignore Gina, because she doesn t own anything in Company C The 3 remaining people control at least 80% of both companies Identical ownership total is 55% These two companies are a controlled group

27 Wait a Minute There, Buddy! There are two controlled groups: Company A and Company B Company B and Company C What does this mean? Company B s plan(s) must be tested twice for coverage (and maybe nondiscrimination): Once with Company A Once with Company C Company B s coverage and (if applicable) nondiscrimination must be generous enough to meet both controlled group testing

28 Why Would Nondiscrimination Testing Be Affected By CGs? Scenario 1: If all three companies are in the same plan, need separate coverage and nondiscrimination testing for the two controlled groups Scenario 2: If the plan covering the Company B employees uses general testing, the average percentage test portion of the average benefits test takes into account all accrued benefits/contributions of all employees of the employer (unless the plans are subject to mandatory disaggregation). So, the test needs to include the employees in other controlled group members

29 Tax-Exempt Organizations No stock ownership 2007 Regulations (effective for 2009 forward): A tax-exempt organization is considered to be under common control with another organization (tax-exempt or for-profit) if at least 80% of the Board of one organization is a representative of or controlled by the other 80% is reduced to 50% for 415 purposes Representative means: trustee, director, agent, or employee of the exempt organization Control means: the other organization has ability to remove such trustee or director and replace him/her with someone else. Based on facts and circumstances

30 Tax-Exempt Organizations Two companies with a common exempt purpose that participate in the same plan can treat themselves as controlled if they regularly coordinate their day-to-day exempt activities The regulations contain an anti-abuse provision allowing the IRS to treat two tax-exempts as a controlled group

31 Combined Controlled Groups

32 Combined Controlled Group Parent 82% ownership 90% ownership Sub 1 Sub 2 This combined group contains one parent and two different subsidiaries. A common parent creates one combined group that can be tested together 32

33 Combination of Parent-Sub and Bro-Sis Controlled Group Parent Bro/Sis to Parent Subsidiary Penny and Leonard own 100% of the parent, which owns 100% of Sub Penny and Leonard also own more than 80% of Bro/Sis In this case, the parent is part of a B/S Controlled Group, as well as the Parent-Sub Controlled Group General rule: if a parent is in a controlled group, the subsidiary of the parent is also in that other controlled group

34 Remember This Scenario? Owner Company A Company B Company C Identical Ownership Gina 20% 10% 0% 0% Barbara 35% 40% 5% 5% Louise 35% 25% 60% 25% Erica 10% 25% 35% 10% Total 100% 100% 100% 40% We determined that there were two separate CGs (A-B and B- C) But, there is not one big combined CG because the three companies, considered together, did not meet the effective control test.

35 What About Companies That Are Not Corporations? Code Section 414(c) applies controlled group rules to unincorporated entities Corporate ownership based on stock Partnership ownership based on profits or capital interest Trust based on actuarial value of beneficial interest Nonprofits ownership based on common control Are directors controlled by directors of other entity? If 80%+, there is a controlled group

36 Attribution of Ownership (What s Mine is Yours)

37 Attribution of Ownership Attribution means that one person/entity s ownership is considered to be owned by a related person or entity Family attribution Attribution among companies, trusts, etc. 37

38 Attribution Among Spouses A spouse is generally considered to own all the stock owned by his/her spouse Exception: Spouse has no direct ownership in owner s business Spouse is not a director or employee of the business, nor does he/she participate in management of the business No more than 50% of the income is derived from passive activity No disposition restrictions in favor of spouse or minor children Community property state problem: each spouse is considered to own 50% of community So does the exception apply? 38

39 Attribution Among Parents and Children Parent considered to own stock of minor children Parent considered to own stock of adult children if parent owns more than 50% of the business Minor child is considered to own stock of parent Adult child is considered to own stock of parent only if child owns more than 50% of the business 39

40 Example: Adult Kids Jerry owns an accounting firm and his adult son, Jonathan, owns a comic book store. Neither has an interest in the other s business. A parent s ownership in a company attributes to a child only if the child owns at least 50% of the company. Jerry owns nothing in the comic book store to attribute to Jonathan. A child s ownership in a company attributes to a parent only if the parent owns at least 50% of the company Jonathan owns nothing in the accounting firm to attribute to Jerry.

41 Example: Adult Kids Suppose instead that Jerry and Jonathan each own 10% of the other s business. Jerry s interest in the comic book store would attribute to Jonathan, because Jonathan owns more than 50% of the comic book store (so, Jonathan s actual and attributed interest total 100%) Jonathan s interest in the comic book store does not attribute to Jerry, because Jerry does not own 50% of the store Jonathan s interest in the accounting firm would attribute to Jerry, because Jerry owns more than 50% of the accounting firm (so, Jerry s actual and attributed interest total 100%) Jerry s interest in the accounting firm does not attribute to Jonathan, because Jonathan does not own 50% of the firm

42 Attribution Between Grandparents and Grandchildren Grandparent considered to own stock of grandchild if grandparent owns at least 50% of the company Grandchild considered to own stock of grandparent if grandchild owns at least 50% of the company 42

43 The Minor Child Problem Suppose Ilene owns a law firm and her husband, Jerry, owns an accounting firm and neither is involved in the other s company They do not live in a community property state Pursuant to the spousal exception, their company interests do not attribute to each other because of the spousal exception But, their daughter, Zoe, is a minor

44 The Minor Child Problem Ilene s interest in the law firm attributes to Zoe, who is a minor child Jerry s interest in the accounting firm attributes to Zoe Zoe is considered to own 100% of both companies through parent-child attribution The companies are in a controlled group as the spousal exception is not an exception to child attribution (Yikes!)

45 Attribution Among Siblings None 45

46 Example Besides Jonathan (the comic book store owner), Ilene and Jerry have another son: Jared, who owns a record store. Jared and Jonathan s interest in their respective businesses do not attribute to each other (or to their sister, Zoe) There is no attribution between Ilene and Jerry and their sons, as there is no cross-ownership and ownership only attributes between adult kids and their parents if one of them owns 50% of the company

47 Double Attribution Generally, there is no double attribution among family members Double Attribution: The ownership of a company attributes from one family member to another and then attributes to a third family member who is not related to the original owner Example 1 (no double attribution): Ilene s interest in her company attributes to her husband, Jerry Ilene s interest in her company attributes to her minor child, Zoe Example 2 (double attribution): Ilene s interest in her company attributes to her husband, Jerry Jerry s interest in Ilene s company then attributes to his daughter from an earlier marriage (i.e., not Ilene s child), Mergatroid

48 Business Attribution - Partnerships 5% partner is considered to own a proportionate share of a company owned by the partnership This rule also applies to LLCs that elect to be taxed as a partnership, and LLPs 48

49 Example 1 Susan and Barbara are partners in a partnership, SB. Susan s interest is 4% and Barbara s interest is 96%. SB owns 20% of another company, ABC. Because Barbara owns 5% or more of SB, she is attributed a pro-rata share of the stock in ABC: 96% (her ownership of SB) x 20% (SB s ownership of ABC) = 19.2% of ABC is deemed to be owned by Barbara Because Susan s interest in SB is less than 5%, she is attributed none of the stock in ABC.

50 Example 2: A Variation of Example 1 Susan and Barbara are partners in a partnership, SB. Susan s interest is 5% and Barbara s interest is 95%. SB owns 20% of another company, ABC. Because Barbara owns 5% or more of SB, she is attributed a pro-rata share of the stock in ABC: 95% (her ownership of SB) x 20% (SB s ownership of ABC) = 19% of ABC is deemed to be owned by Barbara In this example, Susan owns 5% of SB. Therefore, she now is attributed her pro-rata share of the ABC stock owned by SB: 5% x 20% = 1%

51 What Is Partnership Ownership? Ownership of either capital or profits share of the partnership counts for attribution purposes. Example: Martha is a nonequity partner in a legal partnership. She has no capital ownership, but gets 10% of the profits. She would be attributed her pro-rata share of any entity that the partnership owns.

52 Business Attribution - Corporations 5%+ shareholders are considered to own proportionate ownership in stock owned by the corporation Note: ownership is based on value, so you would aggregate the value of all the various classes of stock Owner of options considered to own the relevant share of the company Treasury stock is attributed to no one

53 Example 1 Erica and Aaron are 50% shareholders in a corporation, EA, Inc. EA, Inc. owns 40% of another entity, XYZ. Erica and Aaron are each deemed to own 20% (50% x 40%) of XYZ.

54 Example 2 Erica is a 4% shareholder and Aaron is a 96% shareholder in a corporation, EA, Inc. EA, Inc. owns 40% of another entity, XYZ. Aaron is deemed to own 38.4% of XYZ. There is no attribution to Erica, because she does not own at least 5% of EA.

55 Example 3 Continuing the facts of Example 2 (Aaron owns 96% and Erica owns 4% of EA): Aaron has granted Erica an option in half of his shares of EA. Erica is deemed to own 48% of EA, plus her direct interest of 4%, for a total of 52% of EA.

56 Attribution from Estates and Trusts Beneficiary considered to own actuarial share of stock owned by trust/estate if such interest is 5% or more Grantor of trust is considered to own the stock owned by the trust

57 Big Case Study

58 Big Case Study Facts: The Ward Family and the Farmer Family share ownership in WF, Inc. and Ward-Farmer Manufacturing, Inc. Members of the Ward Family also have ownership in another company. Question: Are there any controlled groups? Companies at issue: WF, Inc.: 40% by Mark Ward, 10% by Marta Ward, 10% by Scott Farmer, 5% by Macie Farmer, 5% by Les Farmer, 30% by Farmer Family Trust Brynne Management, Inc.: 100% by Brynne Ward Ward-Farmer Manufacturing, Inc.: 10% by Marta Ward, 50% by Lisa Farmer 10% by Les Farmer, 30% by Macie Farmer,

59 Big Case Study Family Relationships: Ward Family: Mark and Marta are married Brynne is their adult daughter Mark Brynne Marta Farmer Family: Lisa and Scott are married Les is their adult son Macie is their minor daughter Lisa and Scott are grantors of the Farmer Family Trust Scott Les Lisa Macie

60 Actual Owners: Big Case Study WF, Inc. Brynne Mgmt Ward - Farmer Mfg Mark W. 40% 0% 0% Marta W. 10% 0% 10% Brynne W. 0% 100% 0% Scott F. 10% 0% 0% Lisa F. 0% 0% 50% Les F. 5% 0% 10% Macie F. 5% 0% 30% Farmer Trust 30% 0% 0% Total 100% 100% 100%

61 Big Case Study Because no company owns another company, we do not have any parent-subsidiary CGs everything is either a B-S group or not controlled

62 Big Case Study Attribution of Ownership: Family Because we need to attain a certain level of ownership to get a controlled group, I find the best way to do this is to attribute as much as possible to one person in the family, then do other layers of attribution to lesser owners If there is no attribution from a given entity to the one person I picked, does it attribute to anyone else in the family?

63 Big Case Study Ward Family Attribution Mark Marta Brynne WF, Inc. Brynne, Inc. Ward-Farmer Mfg. 40% + 10% from Marta (spousal) 10% - 10% attributes to Mark 0% no attribution from either parent, as she is an adult No attribution from Brynne, as she is an adult No attribution from Brynne, as she is an adult 0% + 10% from Marta 10% - 10% attributes to Mark 100% 0%

64 Big Case Study Farmer Family Attribution Scott Lisa Les Macie Farmer Trust WF, Inc. Brynne, Inc. Ward-Farmer Mfg. 10% - 10% attributes to Lisa 0% +10% from Scott + 5% from Macie (she s a minor) + 30% from Farmer Trust 5% no attribution to/from either parent, as he is an adult and they do not own 50% 5% - 5% attributes to Lisa 30% - 30% attributes to Lisa (grantor) 0% 0% 0% 0% 50% + 10% from Les (she owns 50% so gets attribution from adult son) + 30% from Macie 10% - 10% attributes to Lisa 0% 30% - 30% attributes to Lisa 0% 0%

65 Attributed Owners: OK, Let s Re-Look at Ownership WF, Inc. Brynne Mgmt Farmer Mfg Mark W. 50% 0% 10% Marta W. 0% 0% 0% Brynne W. 0% 100% 0% Scott F. 0% 0% 0% Lisa F. 45% 0% 90% Les F. 5% 0% 0% Macie F. 0% 0% 0% Farmer Trust 0% 0% 0% Total 100% 100% 100%

66 Let s Apply the Rules (to all 3 Cos) Owner WF, Inc. Brynne Mgmt Farmer Mfg Identical Ownership Mark 50% 0% 10% 10% Brynne 0% 100% 0% 0% Lisa 45% 0% 90% 0% Les 5% 0% 0% 0% Total 100% 100% 100% 10% No one has ownership in all 3 companies, so they cannot be a controlled group Brynne is the only owner of Brynne Management, and she owns nothing in any of the other companies, so Brynne Management cannot be a part of a CG with any of these entities

67 Let s Apply the Rules (to just WF and FM) Owner WF, Inc. Brynne Mgmt Farmer Mfg Identical Ownership Mark 50% 0% 10% 10% Brynne 0% 100% 0% 0% Lisa 45% 0% 90% 45% Les 5% 0% 0% 0% Total 95% 100% 100% 55% Eliminate Brynne and Les from consideration because they do not own anything in one or both of the companies 3 remaining individuals own at least 80% of both companies The same 3 individuals own more than 50% when identical ownership is considered These two entities make up a Brother-Sister Controlled Group

68 QUESTIONS? 32

69 Contact Information ILENE H. FERENCZY Ferenczy + Paul LLP 2200 Century Parkway, Ste. 560 Atlanta, Georgia (678) ilene@ferenczypaul.com 69