Health Care Entities Beware: Have you Inadvertently Formed a Controlled Group or Affiliated Service Group for your Employee Benefit Plans?

Health care entities – and their often complex structures with various degrees of related entities – are particularly prone to inadvertently forming a controlled group or affiliated service group for employee benefit plan purposes.  While in some cases, related employers seek to form a controlled group or affiliated service group, in other cases, forming a controlled group or affiliated service group (often, inadvertently) can be detrimental to the qualification of the various employers’ benefit plans.

When a controlled group or affiliated service group is formed, the multiple employers in the group, in aggregate, must satisfy the qualified plan requirements including, for example, nondiscrimination testing, compensation limits, minimum participation requirements, and service credit for eligibility and vesting purposes.

Controlled Group Rules

Either a parent-subsidiary group or a brother-sister group can form a controlled group, thereby causing the several employers to be treated as one for employee benefit plan purposes.  The parent-subsidiary group and brother-sister group definitions require a calculation of the levels of mutual ownership or (in the non-profit context) control among the related organizations.  Importantly, when considering the levels of ownership or control, the IRS’s family attribution rules apply, so any ownership interest of an individual’s spouse, parent, or child is credited to that individual.

Affiliated Service Group Rules

While an affiliated service group may be formed in a number of ways, the most common and relevant to the health care industry include:

• Management group. An affiliated service group is formed when one organization is in the principal business of performing, on a “regular and continuing basis,” management functions for another (or multiple) organization(s).  For example, a PEO can inadvertently form a management group with its various clients, if the arrangement is not carefully drafted.
• A-organization group. An affiliated service group is formed when there are two (or more) service organizations, and one service organization has an ownership interest in the other.  One service organization (the “A-Org”) must (i) regularly perform services for the other service organization, or (ii) be regularly associated with the other service organization in performing services for third parties (e.g., patients). 

Consequences of Affiliated Service Group and Controlled Group Rules

If an affiliated service group or controlled group is formed, all of the employees of the related employers, together, are treated as if they were employed by one employer.  This can significantly impact the design of qualified retirement plans if, for example, a physician’s P.C. provides lucrative benefits for the P.C.’s employees—many or most of whom are considered highly compensated employees under the tax rules—because those employees must be aggregated with all employees in the group for plan qualification purposes, including, for example nondiscrimination testing.  If the related employer’s retirement plan does not provide substantially similar benefits as the P.C.’s, the P.C. plan could be forced to decrease its benefits (or the related employer’s plan would need to be amended to increase benefits to “match” the P.C.’s).

Relatedly, many employers seek to form a controlled group or affiliated service group when they want all related employers to be treated as one employer for employee benefit plan purposes.  One benefit in doing so is that only one plan must be maintained by the various employers; only one Form 5500 filing must be filed for the plan; only one employer is tasked with the strict fiduciary duties associated with administering the plan; and communication among the various related employees is often simpler.

The controlled group and affiliated service group rules are complex, technical, and highly factual.  Health care entities with employee benefit plans should review their various related entities to confirm whether a controlled group or affiliated service group has been formed, and analyze the potential consequences.