Another Reason Family Matters…for Employee Benefit Plan Compliance

By Stacey Stewart

Do you know who your family is? That may seem like a silly question for many of us. We just made it through another holiday season hopefully filled with fun and revelry. You likely had to consider who you should invite to participate in your holiday gatherings and what might happen if you did/not invite certain relatives.

Well believe it or not, some of those same considerations apply to your corporate family as well. In fact, knowing who is considered part of your corporate family is extremely important for purposes of employee benefit plan (“EB”) compliance. How you treat those family members can have significant financial and other ramifications. So, do you know who your family is…from a corporate perspective?

There are generally two sets of rules that can apply to bring another company into your family for EB compliance purposes: the controlled group rules and the affiliated service group (“ASG”) rules. The controlled group rules relate companies based on ownership whereas the ASG rules relate companies based on service relationship. If two companies are sufficiently related under one of these sets of rules then they are generally considered one employer for many benefit plan purposes.

To elaborate, there are two types of controlled groups and the analysis can get pretty involved, but to greatly oversimplify, in the end there generally needs to be at least 80% common ownership. A parent-subsidiary controlled group occurs where a company owns 80% of one or more others. A brother-sister controlled group is where five or fewer individuals (estates or trusts) together own at least 80% of each company and more than 50% of each company taking into account each person’s ownership interest only to the extent that it is identical with respect to each company. Plus there are situations which we term “constructive ownership rules” where one person can be considered to own the interest held by another (e.g., parent considered to own the stock owned by his/her minor children).

The IRS developed the ASG rules to address a perceived abuse with service providers, such as doctors, dentists, CPAs and attorneys, structuring their organizations to avoid being considered part of a controlled group. This enabled them to do certain things the IRS disliked, such as setting retirement plan provisions to favor the highly compensated.

There are three types of ASGs and although the rules are much too complex to cover in detail here, to once again greatly oversimplify, they generally apply where a company is performing services for another company or the two companies are regularly associated in performing services together. Two types of ASGs require a service organization (which is a company, such as a law firm or engineering firm, where capital is not an income producing factor) and a measure of common ownership. But the third type – a management services group – can exist without any common ownership at all! Constructive ownership rules apply here as well to attribute the ownership from one person to another in certain circumstances.  

So…figuring out who is part of your corporate family can be complicated. But why is having a firm grasp of who is/not part of your corporate family so very important?
Here are just a few reasons:

  • You must include your controlled group or ASG members in determining whether your company is an applicable large employer (ALE) member for pay or play purposes;
  • You are required to identify controlled group and ASG members as part of ACA reporting for an ALE member (i.e., in Part IV of Form 1094-C – and this form includes a penalty of perjury statement);
  • You must run most nondiscrimination testing required for benefit plans under the tax code, including for cafeteria plans (Section 125 testing), self-funded plans (Section 105(h)) and 401(k) plans (e.g., 410(b) coverage testing) on a controlled group or ASG basis; and
  • Structuring your medical plan to cover employers that are not part of controlled group generally creates what we call a multiple employer welfare association or “MEWA” which is subject to additional federal and state rules.

Let’s take a minute and look at that last bullet point in more detail. It’s pretty common, especially among small and mid-size businesses, for owners to want to cover all the companies in which they have an interest under one plan. It can allow them to get a better deal on the coverage and perhaps cover a business that wouldn’t otherwise have access to a group health plan. But it’s important to understand that you typically only want to include companies that are part of the same controlled group in your group health plan. To do otherwise will create a MEWA.

Most folks try to avoid creating MEWAs (although there can be reasons to do so) since they are subject to additional federal and state rules. These rules can be particularly significant if not downright problematic if the plan is self-funded (e.g., application and reserve requirements, annual auditing and funding reports etc. and some states even go so far as to prohibit self-funded MEWAs).

You may have noticed the above discussion indicates you can generally only cover controlled group members in your group health plan without creating a MEWA – what about ASG members? While these rules can require companies be considered together for many employee benefit-related purposes, if you include them in the same group health plan it will still create a MEWA. This produces the strange result that an entity must include ASG members in determining ALE status but cannot put them on the same group health plan to possibly avoid the pay or play rules triggered by attaining such status.

To sum things up, the reason you need to understand whether you are part of a controlled group and/or ASG is that it will drive plan design considerations and compliance obligations. It can implicate how you structure your plan, whether you are subject to ACA pay or play and reporting rules, who you can cover under the plan and whether the design will trigger additional tax obligations for your highly compensated employees. Family matters for EB compliance purposes – make sure you know where you stand!

Stacey Stewart, JD
Senior Advisor
McGriff Insurance Services
[email protected]
www.mcgriffinsurance.com