Category: Compensation & Employee Benefits Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Background Corporation X exists solely to service the brokerage businesses of A and B. X maintains the office space, telephone systems, administrative employees, etc. for A and B. X has three employees. The payroll cost attributable to each individual business is determined by prior agreement between A and B, and each proprietorship simply reimburses X for its allocable share of payroll cost as determined by the agreement. Both A and B have established separate Simplified Employer Plans (SEP's). A wishes to contribute to the plan based on 10% of compensation, and B wishes to contribute at the rate of 15%. Discussion The rules were enacted to prevent a common abuse in which highly-paid employees (typically owner-employees) would be employed by one company, and the lower-paid, rank-in-file workers would be employed by a separate company, controlled or somehow affiliated with the first. A generous retirement plan and other tax favored employee benefits would be established for the company employing the highly-paid employees, and a far less generous arrangement (or none at all) would be set up for the company employing the lower-paid employees. I believe the situation set forth above easily fits under either A) the First Service Organization/B Organization rules of Sections 414(m)(2)(B); or B) the management function affiliated service group rules of Section 414(m)(5). Accordingly, it is very clear to me that the affiliated service group rules come into play here. Based on the language of Section 414(m), however, it seems to me we have not one, but two affiliated service groups. Corporation X and the business operated by A is one affiliated service group, and Corporation X and the business operated by B is a second affiliated service group (separate from the first). Proposed Regulation Section §1.414(m)-2(g) confirms that it is possible to simultaneously have more than one affiliated service group. Consider the following example from the regulations. (i) Corporation P provides secretarial service to numerous dentists in
a medical building, each of whom maintains his own separate unincorporated
practice. Dentist T owns 20 percent of the secretarial corporation and accounts
for 20 percent of its gross receipts. Dentist W owns 25 percent of the corporation
and accounts for 25 percent of its gross receipts. As you can see, the facts of the example are quite similar to those here, thus confirming my conclusion that two affiliated service groups are present in this situation. Unfortunately, neither the regulation (nor anything else I have for that matter) provides any guidance as to what one must do once the determination has been made that two affiliated service groups exist Since the parties involved have already agreed how the compensation of each employee is allocated as between the two businesses, I suggest that each employee of X be reported as being covered by both plans (the plan of A's business and the plan of B's business). The covered compensation with respect to A's plan will be A's share of each individual's compensation, and the covered compensation with respect to B's plan will be B's share of each individual's compensation. A will then make contributions to his plan at the desired rate of 10% of A's share of compensation, and B will make contributions to his plan at the desired rate of 15% of B's share of compensation. I think the solution set forth above fulfills the purpose of the affiliated
service group rules. Clearly, the idea is to get the employees of X covered
in a manner commensurate with the coverage provided to A and B. The reality
of the situation is X's employees are shared between two businesses, the
owners of which desire differing levels of coverage. Economically, the employees
are in the same position under the solution I have proposed as they would
have been in if each worker were literally employed by both A and B and
worked part-time for each. Each worker would be covered and contributions
would be made by each separate employer based on the amount of compensation
paid to each employee by each respective company and the contribution rate
in effect for each respective company. |
