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Controlled Group Rules for Employee Benefit Plans
Practical Law Legal Update 6-523-5241 (Approx. 7 pages)
Controlled Group Rules for Employee Benefit Plans
by PLC Employee Benefits & Executive Compensation
| Published on 15 Jan 2013 • USA (National/Federal) |
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:
- Parent-subsidiary groups. A parent-subsidiary group consists of a parent corporation and its at least 80% owned direct and indirect subsidiaries (see Practice Note, Controlled Group and Affiliated Service Group Rules: Parent-subsidiary Groups).
- 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).
- Combined parent-subsidiary and brother-sister groups. A parent-subsidiary group and a brother-sister group may be combined if the parent is a common member and the applicable requirements are satisfied (see Practice Note, Controlled Group and Affiliated Service Group Rules: Combined Groups).
ERISA Section 414(m) and the underlying ASG rules were later added by Congress to address arrangements devised by employers who attempted to avoid coverage of employees under the controlled group rules by splitting up their functions (see Practice Note, Controlled Group and Affiliated Service Group Rules: Affiliated Service Groups (ASGs)).
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:
- Nondiscrimination testing (see Practice Note, Controlled Group and Affiliated Service Group Rules: Nondiscrimination Testing).
- Minimum participation (see Practice Note, Controlled Group and Affiliated Service Group Rules: Minimum Participation: IRC § 401(a)(26)).
- Service credit for eligibility and vesting (see Practice Note, Controlled Group and Affiliated Service Group Rules: Service Credit: IRC Sections 401(a)(3) and (7)).
- IRC Section 415 compensation definition and maximum contribution and benefit limits (see Practice Note, Controlled Group and Affiliated Service Group Rules: Section 415).
- Number of key employees and top heavy status (see Practice Note, Controlled Group and Affiliated Service Group Rules: Key Employees and Top Heavy Plans: IRC Section 416).
- Required minimum contributions to pension plans and related taxes (see Practice Note, Controlled Group and Affiliated Service Group Rules: Pension Plan Funding).
- Required employer contributions for simplified employee pension plans (SEPs) and savings incentive match plans (SIMPLEs) (see Practice Note, Controlled Group and Affiliated Service Group Rules: SEPs and SIMPLE Plans: IRC Section 408(k)).
Joint and Several Liability
All members of a controlled group are jointly and severally liable for:
- Insurance premiums under Section 4006 of ERISA.
- Plan termination liability under Sections 4064, 4069 and 4062 of ERISA.
- Liability for a single-employer plan under Sections 4062(e) and 4063 of ERISA.
- Plan termination premiums under Section 4006(a)(7) of ERISA.
- Penalties for a failure to notify the PBGC of reportable events, as required by ERISA Section 4043 (see Practice Note, Qualified Retirement Plans in Mergers and Acquisitions: Reportable Events).
- Multiemployer plan termination liability under ERISA Section 4041A.
- Liability upon a complete or partial withdrawal from a multiemployer plan (under Sections 4201 and 4205 of ERISA) (see Practice Note, Qualified Retirement Plans in Mergers and Acquisitions: Multiemployer Plan Withdrawal Liability).
Particularly on account of this liability, controlled group rules become important in corporate mergers and acquisitions. For a thorough discussion of the controlled group issues that arise most frequently in corporate transactions, see Practice Note, Qualified Retirement Plans in Mergers and Acquisitions: Controlled Group Liability.
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:
- COBRA obligations and penalties (see Practice Note, COBRA Overview).
- Nondiscrimination testing for self-insured group health plans (see Practice Note, Nondiscrimination Requirements for Insured Group Health Plans under Health Care Reform).
- Cafeteria plan compliance (see Practice Note, Cafeteria Plans).
- Small business health care tax credit (see Practice Note, Small Business Health Care Tax Credit under Health Care Reform).
- Fringe benefits under the IRC (see Practice Notes, Fringe Benefits under IRC Section 132 and Fringe Benefits: Adoption Assistance Programs).
- Employer mandate under health care reform (see Legal Update, IRS Proposed Rules on Employer Mandate Include Transition Relief for Cafeteria Plan Elections).
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).
- Plan aggregation rules (see Practice Note, Section 409A: Deferred Compensation Tax Rules: Overview).
- Six-month delay for certain specified employees of public companies (see Determining Specified Employees under Section 409 Checklist).
For a detailed analysis of how the controlled group rules apply to welfare plans and deferred compensation arrangements, see Practice Note, Controlled Group and Affiliated Service Group Rules: Health and Welfare Plans and Deferred Compensation Arrangements.