Does a business owner need to be concerned if he or she owns all or part of two different businesses and only wants to cover the employees of one of the businesses with a 401(k) plan or pension plan?
Yes. For example, Ed Jones owns 100% of a real estate sales office and 90% of a coffee shop. If Ed wants to establish a 401(k) plan for his real estate office, he will probably need to offer the plan to the employees of the coffee shop. The real estate office and the coffee shop are “related employers.”
How much ownership can a business owner have and not have to be concerned about being a related employer?
It is not a simple question to answer. It depends on the relationship of the employers and whether or not it is a controlled group or an affiliated service group.
What is a controlled group?
A controlled group of businesses is a group of related employers. A controlled group of businesses may be comprised of corporations, unincorporated businesses,
partnerships, limited liability companies, sole proprietorships, tax-exempt organizations, or any
other form of organization doing business.
How are the employers related?
A controlled group relationship exists if the businesses have a “parent-subsidiary” relationship or a brother-sister” relationship.
What is a Parent-Subsidiary relationship?
A parent-subsidiary relationship exists when one business owns at least 80% of one or more other businesses. For example, Corporation X owns 95% of Corporation Y. X and Y constitute a controlled group.
What is a Brother-Sister relationship?
A brother-Sister relationship exists if 5 or fewer common owners satisfy an 80% common ownership test and a 50% identical ownership test.
What is an affiliated service group?
An affiliated service group is another type of group of related employers. This type of group includes two or more organizations that have a service relationship and in some cases, an ownership relationship.
What is an example of an affiliated service group?
A classic example of an affiliated service group is a law firm that is structured as a partnership. There are four partners. Each partner is incorporated as a professional corporation. Each corporation has a 1/4th partnership interest in the law firm. In this case, the partnership and the four professional corporations constitute an affiliated service group.
What is the effect of being a controlled group or an affiliated service group?
If two or more organizations are part of a controlled group of businesses, or an affiliated service group, the organizations are treated as a single employer when applying qualified plan requirements.
How can I find out if I have a controlled group or an affiliated service group?
Contact Sheffler Consulting first. For many situations it is clear whether or not a related employer situation exists.
Other business relationships may be quite complicated and you may need the advice of an ERISA Attorney. Please see our web link to several ERISA law firms.