Affordable Anxiety and Controlled Groups: You Can Run, but You Can’t Hide
Part 3: Affiliated Service Groups
By William Johnson- President and CEO
CIBC of Illinois, Inc.
In the previous two parts of the Controlled Group series we looked at a few different types of groups that the IRS deems Controlled Groups, or groups where two or more employers must be grouped together and treated as a single employer for certain purposes. Today, we will look at the final types of controlled groups, Affiliated Service Groups.
What is an Affiliated Service Group?
Affiliated Service Group rules are directed at professionals (for example, doctors, attorney and accountants) and other service organizations that that use separate service companies or management companies.
An Affiliated Service Group is a group of two or more organizations that have a service relationship and sometimes an ownership relationship. These relationships include; A-Organization groups, which consist of a First Service Organization (FSO) and at least one A-Organization, B-Organization groups, which consist of an FSO and at least one B-Organization, and Management groups.
An organization is defined as a sole proprietorship, partnership, corporation or any other type of entity regardless of its ownership format. Let’s look at the different types of organizations and their classification criterion.
An organization engaged in any one or more of the following fields is considered a service organization: accounting; actuarial science; insurance; architecture; health; law; performing arts; consulting; and engineering.
A professional services corporation is a corporation organized to provide professional services and has a least one shareholder who is licensed to perform the services for which the corporation is organized.
An A-Organization group consists of an FSO and at least one A-Organization. A service organization is an A-Organization if it is a partner or shareholder in the FSO, and itt consistently performs services for the FSO or is regularly associated with the FSO in performing services for third parties. The working relationship test involves reviewing the facts and circumstances of each relationship.
Example – Blue Partnership is a law partnership. Yella Corporation is a partner in the law firm. Blue provides paralegal and administrative services for the attorneys in the law firm.
Yella is an A-Organization because is it a partner in the FSO and it is regularly associated with the law firm in performing services for third parties. Thus, Blue Partnership and Yella Corporation are an affiliated service group.
Another classification is a B-Organization. An organization qualifies as a B-Organization if a significant part of business is the performance of services for the FSO, for one or more A-Organizations or for both, the services are historically performed by employees in the service field of the FSO or the A-Organizations, and those who are highly compensated employees of the FSO or the A-Organizations that in total hold 10 percent or more of the interests in the organization.
It is very important to note that a B-Organization does not need to be a service organization.
A facts and circumstances analysis applies when determining whether providing services constitutes a substantial portion of the business of an organization. There are two tests that are used to verify the facts and circumstances. These are a service receipts safe harbor test and a total receipts threshold test.
Example – Green Partnership is an accounting firm with 13 partners that are deemed highly compensated employees under IRS Code 414(q). Each partner owns 1 percent of the stock of Stella Blue Corporation. Stella Blue provides services to Green of a type historically performed by employees in the accounting field. A significant portion of Stella Blue’s business consists of providing services to ABC.
Green is an FSO. Stella Blue is a B-Organization because a significant portion of its business involves performing services for the accounting firm of a type historically performed by employees in the accounting field. Also, more than 10 percent of the interests in Green are held by highly compensated employees of the FSO. Thus, Green Partnership and Stella Blue Corporation are an affiliated service group.
Remember, the aggregation rules of Code section 318 apply. An individual is considered to own stock owned by his spouse, children, grandchildren and parents. Also, Code section 318 contains attribution rules for business relationships.
The final type of Affiliated Service group we will examine is the management-type affiliated service group. They exist if an organization performs management functions, and the management organization’s principal business is performing management functions on a regular and continuing basis for a recipient organization.
It is crucial to note that there does not need to be any common ownership between the management organization and the organization for which it provides services.
A recipient organization is an organization for which management services are performed, any organizations aggregated under the controlled group or affiliated service group rules,andrelated organizations (described under IRS Code section 144(a)(3)).
There are tests that can be used to determine a management organization’s principal business on a regular and continuing basis: tax-year rolling percentage test; percentage of gross receipts test; and facts and circumstances test.
Example: Sam and Dave Corporations are part of a controlled group. Shoe Corporation performs management functions for Sam Corporation on a consistent basis, and this is Shoe Corporation’s principal business. Sam and Dave Corporations are treated as the service recipient. In this scenario, Sam, Dave and Shoe Corporations are an affiliated service group.
We hope this series has helped spur some thought on how the ACA (via the IRS) will assess your business and the compliance issues associated with how it is set up. We are not lawyers, and we always recommend consulting legal professionals for specific answers to your situation. We do know that these laws are having a great impact on how people are, and will be structuring their organizations going forward.
This article is intended for informational purposes only and should not be construed as legal advice. Please consult with a legal professional for legal opinions.
To get more information on CIBC of Illinois, visit us at www.CIBCINC.Com or call toll free 877-936-3580.
Posted on April 2, 2013, in Health Care Reform and tagged Affordable Care Act, Benefit Consultant, benefit consulting, Business, College Benefits, college health insurance, Consultant, Controlled Groups, Employee benefit, employee benefits, Employer Mandate, Employment, ERISA, group health insurance, health insurance, Healthcare Reform, Illinois, Insurance, Kankakee, Obamacare, Patient Protection and Affordable Care Act, PPACA, Shared responsibility mandate. Bookmark the permalink. Leave a comment.