COMMONLY CONTROLLED EMPLOYERS | Plan Qualification Requirements

Often an employer organization (incorporated or unincorporated) is owned or controlled in common with other such organizations. The qualified plan designer often must coordinate plan coverage for the first employer with plan coverage for employees of other members of the commonly controlled group of employers.

The Code has several provisions relating to this issue; their basic objective is to prevent a business owner from getting around the coverage and nondiscrimination requirements for qualified plans by artificially segregating employees to be benefited from the plan into one organization with the remainder being employed by subsidiaries or organizations with lesser plan benefits or no plan at all. While this is still technically possible, the controlled group rules restrict this practice considerably.

Controlled Group Rules in General
Because the forms of business ownership can be tangled and complex, the common control rules for qualified plans are appropriately complicated. There are three sets of these rules.

1. Under Code Section 414(b), all employees of all corporations in a controlled group of corporations are treated as employed by a single employer for purposes of Sections 401, 408(k), 410, 411, 415, and 416. The major impact of this comes from the participation rules of Section 410, which require that the participation and coverage tests be applied to the entire controlled group rather than to any single corporation in the group. Code Section 414(c) provides similar rules for commonly controlled partnerships and proprietorships.

2. Code Section 414(m) provides that employees of an affiliated service group are treated as employed by a single employer. This requirement similarly has its major impact in determining participation in a qualified plan; however, it applies to other employee benefit requirements as well.

3. A leased employee is treated as an employee of the lessor corporation under certain circumstances, under Code Section 414(n).

Some examples will give a general idea of the impact of these provisions on plan design; Note that the common thread of these examples is that the related organization's employees must be taken into account in applying the participation rules. This does not mean that these employees must necessarily be covered.

• Alpha Corporation owns 80 percent of the stock of Beta Corporation. Alpha and Beta are members of a parent subsidiary controlled group of corporations. In applying the participation and coverage rules of Code Section 410, Alpha and Beta must be considered as a single employer.

• Medical Services, Inc., provides administrative and laboratory services for Dr. Sam and Dr. Joe, each of whom is an incorporated sole practitioner. Dr. Sam and Dr. Joe each own 50 percent of Medical Services, Inc. If either Dr. Sam or Dr. Joe adopts a qualified plan, employees of Medical Services, Inc., will have to be taken into account in determining if plan coverage is nondiscriminatory.

• Calculators Incorporated, an actuarial firm, contracts with Temporary Services, Inc., an employee-leasing firm, to lease employees on a substantially full-time basis. The leased employees will have to be taken into account in determining nondiscrimination in any qualified plan of Calculators, unless Temporary maintains a minimum (10 percent nonintegrated) money-purchase pension plan for the leased employees.