Controlled Group Case Studies Ilene H. Ferenczy, Esq., APA, CPC, Managing Partner, Ferenczy + Paul LLP Ilene H. Ferenczy, Esq., APA, CPC, Managing Partner, Ferenczy + Paul LLP Ilene Ferenczy is the managing member of Ferenczy + Paul LLP with offices in Atlanta, GA, Sacramento, CA, and Knoxville, TN. Ilene particularly focuses her practice on qualified retirement plans, benefits issues in mergers and acquisitions, and advising third-party administrators of employee benefit programs on technical and practice issues. Ilene became an attorney after more than ten years as a third- party administrator, and she brings a unique and practical approach to her advice to clients.
Ilene H. Ferenczy, Esq., APA, CPC, Managing Partner, Ferenczy + Paul LLP She is a member of the State Bars of Georgia and California, and holds designations as a Certified Pension Consultant from the American Society of Pension Professionals and Actuaries ("ASPPA ”) and Accredited Pension Administrator from the National Institute of Pension Administrators. She is a nationally known speaker on benefits issues and has authored more than 70 articles and five books. Ilene is the first female co-chair of ASPPA’s Government Affairs Committee, was the 2007 recipient of ASPPA’s Educator of the Year Award, and is a Fellow in the American College of Employee Benefits Counsel. Agenda • Introduction • Parent-Subsidiary CGs • Brother-Sister CGs • Combined CGs • Attribution of Ownership • Big Case Study
Introduction Why Are There Controlled Group Rules? • Congress intends that the benefits of qualified plans are to be available only if the plans cover a broad cross- section of employees and are nondiscriminatory • The CG rules dissuade companies from trying to bypass these rules by using different company structures 6
Effect of CG Rules • If two or more companies are part of a controlled group, they are treated as one company for benefits purposes for: • Coverage (IRC § 410(b)) • Nondiscrimination (IRC § 401(a)(4)) • Benefits Limits (IRC § 415) • Compensation Limits (IRC § 401(a)(17)) • Service Crediting (IRC §§ 410 and 411) • Top-Heavy Rules (IRC § 416) • Deferral and Catch-up Limits (IRC §§ 401(a)(30), 414(v)) 7 Types of Controlled Groups • Parent-Subsidiary • Deals with one company owning another • Brother-Sister • Deals with two or more companies being owned by the same people or entities • Combined Groups • Deals with entities that include some parent-subsidiaries and some brother-sisters 8
Parent-Subsidiary Controlled Groups Parent-Subsidiary Controlled Group Parent A parent-subsidiary Company group exists if one company (the “ parent ”) owns at At least 80% least 80% of another company (the “ subsidiary ”) Subsidiary 10
Special Rule for IRC § 415 • For purposes of applying § 415 limitations, the “at least 80%” ownership requirement becomes “more than 50%” • Example: • Mary owns 100% of M company and M company owns 70% of Z company. Each company sponsors a plan, and Mary (and only Mary) participates in both plans. • M and Z are not a controlled group for most purposes, including coverage, eligibility, vesting because M doesn’t own at least 80% of Z. • BUT, M and Z are a parent-subsidiary controlled group for § 415 purposes, because M owns more than 50% of Z. • So, when Mary’s maximum benefit/contribution amounts are determined, her benefits in both the M plan and the Z plan must be aggregated. Brother-Sister Controlled Groups
Or, For the More Cynical Among You Brother-Sister Controlled Groups Brother-Sister Controlled Group • Deals with companies owned by the same other individuals, estates, or trusts • Two-Part Test: • 80% Common Control Test • 50% Effective Control Test 14
Brother-Sister Controlled Group • 80% Common Ownership: • Five or fewer common owners own at least 80% of each company • Common owners: • Individuals • Trusts • Estates • Note: not other businesses (those fall under parent-subsidiary rules) • Ignore common owners who own no interest in one or more of the companies under consideration (but be careful …) – Vogel Fertilizer decision 15 Brother-Sister Controlled Group: 80% Common Ownership Test Owner Company A Company B Jonathan 70% 30% Jared 30% 60% Zoe 0% 10% • These three individuals own all of the two companies • Zoe, however, has no ownership in Company A, so she is ignored for this test • So, Jonathan and Jared together own 100% of Company A and 90% of Company B – 80% common ownership test is met 16
Brother-Sister Controlled Group: 80% Common Ownership Test Owner Company A Company B Jonathan 70% 30% Jared 30% 10% Zoe 0% 60% • These three individuals own all of the two companies • Zoe, however, has no ownership in Company A, so she is ignored for this test • So, Jonathan and Jared own 100% of Company A but only 40% of Company B – 80% common ownership test is failed 17 Brother-Sister Controlled Group • 50% Effective Control Test: • The same five or fewer common owners from the 80% common ownership test have more than 50% ownership when only identical ownership is considered • Identical ownership is the lowest ownership the individual has in any of the companies being considered 18
Brother-Sister Controlled Group: 80% Common Ownership Test Owner Company A Company B Identical Ownership Jonathan 70% 30% 30% Jared 30% 60% 30% Zoe 0% 10% 0% • These three individuals own all of the two companies • Jonathan’s lowest ownership is 30% • Jared’s lowest ownership is 30% • The total, 60%, is greater than 50% – companies are a controlled group 19 Brother-Sister Controlled Group: 80% Common Ownership Test Owner Company A Company B Identical Ownership Jonathan 90% 30% 30% Jared 10% 60% 10% Zoe 0% 10% 0% • These three individuals own all of the two companies • Jonathan’s lowest ownership is 30% • Jared’s lowest ownership is 10% • The total, 40%, is not more than 50% - companies are not a controlled group 20
Another Example Identical Corporation A Corporation B Ownership Dylan 40% 30% 30% Maggie 20% 40% 20% Joan 35% 15% 15% Lewis 5% 0% n/a Shannon 0% 15% n/a Ownership of 5 or 95% 85% 65% fewer (D, M, J) • Individuals with ownership in both companies control at least 80% (80% common control test passed) • Same individuals have identical ownership of more than 50% (50% effective control test passed) 21 Be Careful When There Are More Than Two Companies Identical Owner Company A Company B Company C Ownership Gina 20% 10% 0% 0% Barbara 35% 40% 5% 5% Louise 35% 25% 60% 5% Erica 10% 25% 35% 10% Total 80% 90% 100% 20% • Gina has no ownership in one of the companies, so she is ignored entirely • The remaining 3 individuals own at least 80% of all companies (common control test is passed) • But, the same 3 individuals do not own more than 50% when identical ownership is considered (50% effective ownership test is failed)
Be Careful When There Are More Than Two Companies • Are we done? • NO!! • We must consider any sub-groupings of the various companies to determine if they represent a controlled group • Possible CGs: A-B-C A-B A-C B-C Be Careful When There Are More Than Two Companies Identical Owner Company A Company B Company C Ownership Gina 20% 10% 0% 10% Barbara 35% 40% 5% 35% Louise 35% 25% 60% 25% Erica 10% 25% 35% 10% Total 100% 100% 100% 80% • Consider first just A and B • 4 people control 100% of both companies • Identical ownership total is 80% • These two companies are a controlled group
Be Careful When There Are More Than Two Companies Identical Owner Company A Company B Company C Ownership Gina 20% 10% 0% 0% Barbara 35% 40% 5% 5% Louise 35% 25% 60% 35% Erica 10% 25% 35% 10% Total 80% 100% 100% 50% • Now consider just A and C • Ignore Gina (no ownership in Company C) • 3 remaining people control at least 80% of both companies • Identical ownership total is 50% - not more than 50% • These two companies are not a controlled group Be Careful When There Are More Than Two Companies Identical Owner Company A Company B Company C Ownership Gina 20% 10% 0% 0% Barbara 35% 40% 5% 5% Louise 35% 25% 60% 25% Erica 10% 25% 35% 25% Total 100% 90% 100% 55% • Now consider just B and C • We ignore Gina, because she doesn’t own anything in Company C • The 3 remaining people control at least 80% of both companies • Identical ownership total is 55% • These two companies are a controlled group
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