One common cause of plan qualification errors involves lack of compliance with the “related employer” rules that apply to employee benefit plans (controlled and affiliated service groups). This article provides a brief summary of the related employer rules for benefits purposes.
What is a “Related Employer” for Benefits Purposes?
Employee benefit plans are subject to a myriad of statutory and regulatory requirements that require aggregation of one employer with other related companies for benefit plan purposes. Related employer status can be based on two or more trades or businesses being in the same “controlled group/group of businesses under common control” (IRC Section 414(b) and 414(c)) or being in the same “affiliated service group” (IRC Section 414(m)). The statutes have a broad reach – for example some private equity funds have been held to be a trade or business for this purpose.¹ Controlled or commonly controlled companies include those in a parent-subsidiary group and those in a “brother-sister group” (or combination of the two). They can include non-profit or tax exempt companies and governmental agencies, as well as for profit companies. See FAQ - Rules for Identifying Controlled Groups of Tax-Exempt Organizations. In making these determinations, certain stock and ownership attribution rules apply (e.g., ownership of spouses is attributed to other spouses), further complicating the analysis.
What types of benefit plans are subject to the related employer rules?
The related employer rules apply to most of the more common employee benefit plans, including, for example:
Group health plans (insured and uninsured)
401(k) plans/pension plans (including cash balance plans)
Cafeteria plans (aka flex plans or arrangements)
Group term life insurance
Dependent care assistance programs
Health savings accounts
Deferred compensation plans, including some severance arrangements
Why does it matter if a group of employers are related?
Failure to properly apply the related employer rules can carry very significant costs: qualified retirement plans may fail to meet the Code’s qualification requirements and related companies may be liable for funding deficiencies or withdrawal liability of other related employers. A business’ status as an “applicable large employer” under the Affordable Care Act (as well as ACA reporting) may be affected and the plan may be considered a “multiple employer welfare arrangement” (or “MEWA”). Some health and welfare plans are subject to discrimination tests, which, like qualified plans, must be applied on an aggregated basis. Finally, if a deferred compensation plan, for example, a severance arrangement in an employment agreement, is subject to IRC Section 409A, certain requirements must be applied on a related employer basis.
In determining related employer status, there is no “conservative” approach. If an employer is not sure if it is related to another employer, but decides to “play it safe” and treat the other employer as related, but then finds out it is not, costly mistakes may still have been made. If a group health plan covers the employees of two or more employers who are not in the same controlled group (but who might be in the same affiliated service group), the plan becomes a MEWA. MEWAs are subject to additional reporting requirements and may also be subject to state insurance laws in some situations. And, if a pension plan covers two or more unrelated employers, it requires special language in the plan document applicable to “multiple employer plans” as well.
Practical Tips to Avoid Liability
Employers that sponsor benefit plans can and should proactively address their status as related employers. Here is a list of actions that they can take:
Educate management and staff about these issues;
Hire and consult with competent employee benefits advisors (ERISA counsel, third party administrators, consultants, brokers – note some advisors ask the employer to list related employers on their client intake forms putting the burden on the employer, not the advisor, to be aware of and make this determination);
Gather the information needed to analyze (or have your consultant analyze) related employer relationships;
Analyze and reach a conclusion as to which employers are “related” for benefits purposes;
Take corrective actions if needed (which may include plan amendments, voluntary corrections/VCP filings, additional plan contributions and benefits for some employees, amended filings, etc.; and
Repeat as needed (and at least annually) because related employer status can change based on changes in facts and ownership such as admission of new partners or shareholders, deaths, marriages or divorces, minor children reaching age 21, new business relationships, mergers and acquisitions, retirements and even new legal developments. For example, if a controlled group analysis was performed prior to the Supreme Court’s recent ruling upholding same sex marriage, a same sex couple might have been treated as unmarried resulting in no stock attribution between them. Now, that same couple will be considered as spouses and stock attribution will apply, possibly resulting in controlled group status.
Conclusion
Because the rules regarding related employers are complex, but critical to benefit plan compliance, all employers should work carefully with their benefit plan advisors to be sure they are clear about their own related employer status and then update that analysis regularly to be sure it reflects current facts. If your organization would like more information regarding this topic or any other employee benefits matters, please do not hesitate to contact us at www.boutwellfay.com.
¹ Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund, No. 10-10921-DPW.
© Boutwell Fay LLP 2017, All Rights Reserved. This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us. The information contained in this article is effective as of April 30, 2017.