Affiliated Service Group rules were added to the IRS regulations in the 1980s as part of the existing Controlled group rules (Code §414(m)).
These rules are incorporated in ERISA law so that employers cannot use multiple corporations or business entities to escape coverage or nondiscrimination rules of qualified plans.
There are two types of Affiliated Service Groups (ASG):
- Management function-based
First for an overview of ownership-based ASGs:
An ASG consists of a First Service Organization (FSO) and one or more A-Orgs and/or B-Orgs. The FSO, A-Org and/or B-Org must all be “organizations” (e.g., sole proprietorship, partnership, corporation, LLC or other types of entities). A business is automatically a Service Organization if it engages in one of the following fields:
- Actuarial science
- Performing arts
An A-Org meets all of the following requirements:
- It is a service organization
- It owns some interest in the FSO
- It performs services for the FSO or is regularly associated with the FSO in providing services to third parties
Example: Dr. Smith owns 100% of her medical corporation. Her corporation is a 50% partner in Smith & Wesson Clinic, a partnership. Her corporation provides medical services to the partnership, which in turn provides medical services to the public. Both her corporation and the partnership are service organizations. The clinic is the FSO, and her corporation is the A-Org.
- A significant portion of the business of the B-Org is the performance of services for the FSO and/or its A-Orgs
- The services provided are a type historically performed in the field of the FSO or by the employees of the A-Org.
- At least 10% of the B-Org is owned or deemed to be owned by one or more Highly Compensated Employees of the FSO and/or its A-Orgs.
Example: Jack and Jill are attorneys. Each has his/her own law corporation, and the two corporations own 100% of J and J, LLP. Jack and Jill’s corporations are A-Orgs, J and J LLP is an FSO, and the three organizations together are an ASG.
- The management firm is the organization which performs management functions for a client and/or organizations related to that client as its principal business.
- The client is the organization for which the management firm performs services.
Example: A landscape design and maintenance company splits into two companies. One company, W, was established to employ the workers who perform work in the field, and a second company, M, was established to employ the management and design team. M performs management responsibilities for W, and W is the only client of M. W and M are an ASG.
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What are the consequences of being an Affiliated Service Group for purposes of retirement plans?
If two or more businesses are part of an Affiliated Service Group, the employees of all of the ASG businesses are deemed to be employed by a single employer for purposes of meeting the retirement plan provisions outlined below:
- Non-discrimination rules (§401(a)(4))
- ADP/ACP testing for 401(k) plans (§401(k) and §401(m))
- Compensation limits (§401(a)(17))
- Participation and coverage rules (§401(a)(3), §401(a)(26), and §410))
- Vesting rules (§401(a)(7), and §411)
- Limits on contributions and benefits (§401(a)(16), §415)
- Top-heavy rules (§416)
- SEP and SIMPLE rules (§408(k), §408(p)
In summary, you cannot establish separate entities to try to exclude employees from participating in a retirement plan. These Affiliated Service Group rules, along with the Controlled Group rules, make it very clear that all employees of related companies must be considered together for purposes of benefits and testing. Failure to do so will result in potentially having to retroactively make contributions for all employees who were excluded in prior years plus interest and penalties.
The information outlined here was drafted to provide an overview of these rules only and is not complete. For more information, we welcome you to contact Benefit Resources, your ERISA attorney, or refer to the Internal Revenue Codes referenced and the related regulations.
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