A discussion of the controlled group rules that apply to employee benefit plans governed by the the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act of 1974 (ERISA).
The controlled group rules identify whether two or more corporations and certain other groups of related trades or businesses are treated as if they were one employer under many provisions of ERISA and the IRC applicable to employee benefit plans. PLC's Practice Note, Controlled Group Rules and Affiliated Service Group Rules, co-authored with Carol I. Buckmann, of Osler, Hoskin & Harcourt LLP, provides a comprehensive guide to both the controlled group rules and the affiliated service group rules under ERISA and the IRC, and:
Defines the types of controlled groups under ERISA and the IRC and provides examples of a:
parent-subsidiary group;
brother-sister group;
combined parent-subsidiary and brother-sister group.
Briefly describes the rules for affiliated service groups (ASGs).
Provides information about determination letter applications for plans of members of controlled groups and ASGs.
Analyzes IRS qualification requirements impacted by the controlled group and ASG rules.
Highlights open issues under these rules.
Explains the impact of these rules for welfare plans and nonqualified deferred compensation plans.
Select portions of the Note follow. See the full Practice Note for a thorough analysis of this topic.
Types of Controlled Groups
Under the controlled group rules, the following groups are treated as one employer:
Brother-sister groups. A brother-sister group exists when the same five or fewer individuals, estates or trusts own an at least 80% controlling interest in one trade or businesses and the same five or fewer individuals, estates or trusts own (in the aggregate), but only to the extent that ownership in each entity is identical, more than 50% of each entity (see Practice Note, Controlled Group and Affiliated Service Group Rules: Brother-sister Groups).
Plan Qualification Requirements Affected by Controlled Group Rules
When the sponsor of a qualified retirement plan is a member of a controlled group, all employers of the group must be treated as a single employer to determine if the plan satisfies the requirements of IRC Sections 401, 408(k), 408(p), 410, 411, 415, 416 and 417. Therefore, for each plan sponsored by a controlled group member, the following qualified plan requirements must be satisfied, taking into account all employees and the plans of all members of the controlled group:
Health and Welfare Plans and Deferred Compensation Arrangements
While the Practice Note focuses on pension and profit sharing plans, the controlled group rules also apply to employee welfare benefit plans and deferred compensation arrangements subject to IRC Section 409A.
Controlled group rules apply to numerous types of health and welfare benefits governed under the IRC, such as cafeteria plans, health savings accounts (HSAs), Archer medical savings accounts (Archer MSAs) and self-insured medical reimbursement plans. Examples of the contexts in which controlled group rules apply include:
For deferred compensation arrangements under IRC Section 409A, the controlled group rules apply for purposes of the following rules:
The definition of service recipient or employer.
The determination of when a separation from service occurs. The relevant affiliates of the employer are determined under Treasury Regulation Section 1.409A-1(h)(3), which applies the controlled group rules as though the applicable ownership threshold was 50%, rather than 80% (see Practice Note, Applying Section 409A to Severance Benefits).