MAY 2009 Pension Plan tip of the month...

Controlled Groups and Qualified Retirement Plans

As an employer sponsoring a qualified retirement plan, Paragon will routinely  ask you questions such as - -   are you a controlled group, do the owners have ownership in other entities and what are the details regarding other ownership.  You might be familiar with our Annual Plan Review Questionnaire (APRQ), which contains an Ownership Questionnaire Addendum so you can supply us with this information. 

With this May Tip of the Month, we hope to explain why Paragon is examining the employer’s ownership and its importance in the administration of your plan.

The controlled group rules were adopted to ensure that plan(s) maintained by an employer do not discriminate in favor of highly compensated employees.  All employees of businesses that are under common control are treated as if they are employed by a single employer for purposes of qualification test requirements such as coverage, participation, vesting, benefit/contribution limits, nondiscrimination and top-heavy rules.

A controlled group of corporations can include a parent-subsidiary controlled group, a brother-sister controlled group or a combination of the two.    Controlled group determinations are further complicated by stock attribution rules, especially where family members and partnerships are concerned.

Businesses that are not a controlled group may still need to be treated as one employer under the complex affiliated service group rules.  An affiliated service group is when there are two or more service organizations that have a service or management relationship. Additionally, there may need to be a determination regarding whether or not certain trades or businesses fall under common control. Employees of the other companies under either of these two arrangements may be required to be included in a single plan.

 Below is a very brief explanation of the three types of controlled groups.  Your accountant or legal counsel is best equipped to advise you if you fall under the controlled group or affiliated service group rules.

Parent-Subsidiary Group – This exists if one business owns at least 80 percent of another business.

Brother-Sister Controlled Group – This type of controlled group exists if two tests are met – a controlling interest test and an effective control test.  The controlling interest test is met if five or fewer individuals, estates or trusts own at least 80 percent of either the voting power or the value of the stock of the business.  The effective control test is satisfied if the same individuals together own more than 50 percent of each business.

Combined Group – Three or more corporations, each of which is a member of a parent/subsidiary group or brother/sister group of corporations and at least one corporation is the common parent of a parent-subsidiary and is also a member of a brother-sister group.

In conclusion, controlled groups and affiliated service groups are required to treat the employees of all members of the group as if they were employed by a single employer for nondiscrimination and other plan rules. If the plan fails coverage testing due to including employees under common control, the Employer may be required to fund additional contributions or, if not addressed, the plan may be in jeopardy of disqualification. It is extremely important that you contact your Account Executive regarding any ownership changes or acquisitions so Paragon can assist you in determining whether or not these changes will have any impact on your retirement plan.