Identifying Related Employers: Part I – Affiliated Service Groups

Preventing owners and highly compensated employees from abusing retirement plans’ tax benefits is one of the primary policy goals of the Employee Retirement Income Security Act. One way ERISA accomplishes this is grouping certain commonly owned business entities together as a single employer for plan testing. These rules are referred to as the Affiliated Service Group [hereinafter ASG] rules and Control Group rules.

 

Why are ASG and Control Group rules important?

The existence of an ASG or Control Group can greatly impact a plan. While designing a plan to accommodate the existence of an ASG or Control Group is straightforward, discovering that an existing plan is sponsored by a member of an ASG or Control Group often results in plan sponsors needing to make additional contributions to the plan and expanding plan participation.

As noted above, plan sponsors can easily avoid these costly penalties by using a plan designed to accommodate the existence of an ASG or Control Group, but to do this, a sponsor first needs to know what ASGs and Control Groups are. The rules governing these groups are complex. Because of this, the remainder of this article will focus exclusively on ASGs, while a companion article covers Control Groups.

 

What are Affiliated Service Groups?

At a basic level, Affiliated Service Groups are groups of companies that are connected via a commonly owned, service-oriented company and that provide services to one another. One common example is a group of independent medical practices who jointly own a scheduling company that provides these scheduling services to separate medical practices.

More specifically, an ASG must contain one or more First Service Organizations and at least one A-Organization or B-Organization. People often refer to these three organizations as FSOs, A-Orgs, and B-Orgs.

 

How does a company determine if it is a member of an ASG?

In order for a company to determine if it is part of an ASG, the company must determine if it or any other companies with a shared ownership interest are a FSO, A-Org, or B-Org. When conducting this analysis, it is important to note that the tests used to determine if a FSO, A-Org, or B-Org exists are heavily dependent on the facts and circumstances of each situation. That being said, applying the following flowcharts to each entity sharing some amount of common ownership is a good place to begin.

 

Step 1: Identify First Service Organizations (FSOs)

The first step of determining if an ASG exists, is to determine what, if any, entities tied to the plan sponsor are FSOs. This is because if none of the entities are a FSO, then an ASG does not exist.

 

 

 

Step 2(A): Identify A-Organizations (A-Orgs)

If an FSO is identified in step 1, then analysis moves to step 2(A): identifying all A-Orgs.

 

 

 

Step 2(B): Identify B-Organizations (B-Orgs)

Regardless of step 2(A)’s results, if step 1 identifies a FSO, then analysis should continue to step 2(B): identifying all B-Orgs.

 

 

 

Step 3: Mapping the ASG

After all of the FSOs, A-Orgs, and B-Orgs are identified, they must be sorted into Affiliated Service Groups. When doing this, it is helpful to remember that an ASG only exists if there are

  1. One or more FSOs and
  2. One or more A-Orgs or B-Orgs

This means that when there is no FSO then there is no ASG. Likewise, if no A-Orgs or B-Orgs exists, then there is no ASG.

To illustrate, consider the earlier example involving independently owned medical practices that use a jointly owned scheduling company. In this example, each of the independent practices is a FSO and the jointly owned scheduling company could be an A-Org.

 

 

 

As you can see, the only thing holding the group together is their shared connection to the scheduling company. If that entity did not exist, or if the practices did not jointly own the scheduling company, then the ASG would not exist.

The above example follows a clean hub and spoke model, but ASG groups are not always this clean. Things can become complicated if one of the “spokes” is part of its own ASG. This is because the rules require all overlapping ASGs to be linked together. For example, assume Medical Practice 5 jointly owns a human resources company with a private investment group, and assume both outsource human resources to the HR company.

 

 

In this example, Medical Practice 5, the HR company, and the private investment group would normally form their own ASG, as would the five medical practices and the scheduling company; however, because Medical Practice 5 is a member of both ASGs, federal law considers all eight employers to be a single employer for testing purposes. This means any plan sponsored by one of these eight companies would need to account for the other seven entities’ employees when conducting year-end testing.

 

Check out our next article: Identifying Related Employers: Part I – Affiliated Service Groups

 

Related Articles

Identifying Related Employers: Part II – Control Groups

Identifying Related Employers: Part II – Control Groups

There are two major types of Related Employers: Affiliated Service Groups and Control Groups. Part I of this series discussed the general purpose of Related Employer rules, how they affect plan testing, and explained Affiliated Service Groups.   Why are the...

read more
New 2021 Contribution Limits

New 2021 Contribution Limits

Each year, the IRS adjusts the contribution limits for qualified retirement plans to account for cost of living increases. On October 26, 2020, the IRS published contribution limits for 2021 in Notice 2020-79.   Cost of Living Increases While several limits...

read more

Subscribe to receive our latest posts.

ERISA CONSULTANTS BLOG DISCLAIMER

Articles posted on the ERISA Consultants Blog are provided for general informational purposes only. The materials and content are not intended to provide tax, legal, accounting, financial, or other professional advice. Readers are advised to seek out qualified professionals that provide advice for specific client circumstances. ERISA Consultants makes no warranties about the accuracy or completeness of the information contained in the published articles. While articles are generally published with the most up to date information, ERISA Consultants does not guarantee that the articles will be updated with the most recent information or reflect the most current laws and regulations. 

Third-party links included in any articles are not intended as, and should not be interpreted as, constituting or implying ERISA Consultants’ endorsement, sponsorship, or recommendation of third-party information, products, or services, unless expressly stated otherwise. ERISA Consultants is not affiliated with the owners or participants of any linked websites. The opinions expressed by any guest writers and/or article sources are strictly their own and do not necessarily represent those of ERISA Consultants. Please use caution when linking to other websites.

Information from the ERISA Consultants blog should be used at your own risk. Investing in securities involves risk, and there is always the potential of losing money. Past performance is not a guarantee of future results. Investment returns vary and may involve gains or losses.

Any articles or commentary included on the ERISA Consultants blog do not constitute a tax advice and cannot be used by any taxpayer to avoid penalties that may be imposed under the Internal Revenue Code on the taxpayer.