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A Guide to Employee and Aggregation Issues Affecting Qualified Plans

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Proposed ASG Regulations

EE-003-81 February 28, 1983

NOTE:  The following is the complete text, including preamble, of the 1983 proposed regulations dealing with affiliated service groups.  Although these regulations have never been finalized, taxpayers are promised that they can rely on them.  Unfortunately, they have never been revised to deal with numerous changes in the Internal Revenue Code which have taken place in the last 19 years.  Obviously, where a subsequent change in the Code conflicts with the proposed regulation, the Code takes precedence.  I have indicated those sections of the proposed regulations themselves (not including the preamble) which require modification.  I have added formatting and spacing to make the regulations easier to read.

Contents

bulletPreamble
bulletIdentifying Information, Summary
bulletBackground
bulletStatutory Provisions
bulletPrior Guidelines
bulletAdministrative Exemptions
bulletSignificant Portion
bulletHistorically Performed
bulletConstructive Ownership
bulletOrganization
bulletService Organization
bulletMultiple ASGs
bulletSpecial Qualification Requirements
bulletMultiple Employer Plans
bulletDiscrimination
bulletEffective Dates
bulletReliance on Proposed Regulations
bulletRequest for Comments, etc.
bulletSection 1.414(m)-1 Affiliated service groups
bullet(a)      In general
bullet(b)      Aggregation
bullet(c)      Aggregation not required
bulletSection 1.414(m)-2 Definitions
bullet(a)      Affiliated service group
bullet(b)      A Organization
bullet(1)   General rule
bullet(2)   Regularly performs service for
bullet(3)   Examples
bullet(c)      B Organization
bullet(1)   General rule
bullet(2)   Significant portion
bullet(3)   Historically performed
bullet(4)   Designated group (obsolete)
bullet(5)   Owner
bullet(6)   Aggregation of ownership interests (obsolete)
bullet(7)   Non-service organization
bullet(8)   Examples
bullet(d)      Ownership (obsolete)
bullet(1)   Constructive ownership
bullet(2)   Qualified plans
bullet(3)   Special rules
bullet(4)   Examples
bullet(e)      Organization
bullet(1)   General rules
bullet(2)   Special rule
bullet(f)       Service Organization
bullet(1)   Non-capital intensive organizations
bullet(2)   Specified fields
bullet(3)   Other organizations
bullet(4)   Exempted organizations
bullet(g)      Multiple Affiliated Service Groups
bullet(1)   Multiple First Service Organizations
bullet(2)   Multiple A or B Organizations
bullet(3)   Examples
bulletSection 1.414(m)-3 Employee benefit requirements
bullet(a)      Employee benefit requirements affected (partially obsolete)
bullet(b)      Special Requirements (obsolete)
bullet(c)      Multiple Employer Plans
bullet(1)   General rule
bullet(2)   Special rule
bullet(d)      Discrimination
bullet(e)      Example
bulletSection 1.414(m)-4 Effective dates
bullet(a)      Effective Dates
bullet(b)      Frozen Plans

Home Resources Rev Proc 02-21

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 RIN 1545-AD90

AGENCY: Internal Revenue Service, Treasury.

ACTION: Notice of Proposed Rulemaking.

SUMMARY: This document contains proposed regulations prescribing rules for determining whether two or more separate service organizations constitute an affiliated service group, and detailing how certain requirements are satisfied by a qualified retirement plan maintained by a member of an affiliated service group. Changes to the applicable tax law were made by the Miscellaneous Revenue Act of 1980 [Pub. L. 96-605, 1980-2 C.B. 702]. The regulations would provide the public with additional guidance needed to comply with that Act and would affect all employers that maintain qualified retirement plans and that are members of an affiliated service group.

DATES: Written comments and requests for a public hearing must be delivered or mailed by April 26, 1983. For plans that were not in existence on November 30, 1980, the amendments are effective for plan years ending after that date. For plans in existence on November 30, 1980, the amendments are effective for plan years beginning after that date.

ADDRESS: Send comments and requests for a public hearing to: Commissioner of Internal Revenue, Attention: CC:LR:T (EE-3-81), Washington, D.C. 20224.

FOR FURTHER INFORMATION CONTACT: Patricia K. Keesler of the Employee Plans and Exempt Organizations Division, Office of Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington D.C. 20224 (Attention: CC:LR:T) (202/566-3430) (not a toll-free number).

SUPPLEMENTARY INFORMATION:

BACKGROUND

This document contains proposed amendments to the Income Tax Regulations (26 CFR Part 1) under section 414(m) of the Internal Revenue Code of 1954. These amendments are proposed to conform the regulations to section 201 of the Miscellaneous Revenue Act of 1980 (94 Stat. 3526) [Pub. L. 96-605, 1980-2 C.B. 702] and section 5 of Public Law 96-613 (94 Stat. 3580) [1980-2 C.B. 707]. These regulations do not reflect amendments made to section 414(m) under the Tax Equity and Fiscal Responsibility Act of 1982 [Pub. L. 97-248, 1982-2 C.B. 462]. These regulations are to be issued under the authority contained in section 414(m) and in section 7805 of the Internal Revenue Code of 1954 (94 Stat. 3526, 94 Stat. 3580, 68A Stat. 917; 26 U.S.C. 414(m), 7805)

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STATUTORY PROVISIONS
 
Section 414(m)(1) of the Code provides that, for purposes of certain employee benefit requirements listed in section 414(m)(4), except to the extent otherwise provided in regulations, all employees of the members of an affiliated service group shall be treated as employed by a single employer.

Section 414(m)(2) defines an affiliated service group as a First Service Organization and one or more of the following: (A) any service organization (A Organization) that is a shareholder or partner in the First Service Organization and that regularly performs services for the First Service Organization or is regularly associated with the First Service Organization in performing services for third persons; and (B) any other organization (B Organization) if a significant portion of the business of that organization is the performance of services for the First Service Organization, for A Organizations, or both, of a type historically performed by employees in the service field of the First Service Organization or the A Organizations, and ten percent or more of the interests in the organization is held by persons who are officers, highly compensated employees, or owners of the First Service Organization or of the A Organizations.

Section 414(m)(3) defines a service organization as an organization the principal business of which is the performance of services.

Section 414(m)(5)(A) provides that the term "organization" means a corporation, partnership, or other organization. Section 414(m)(5)(B) provides that the principles of section 267(c) apply in determining ownership.

Section 414(m)(6) provides that the Secretary of the Treasury or his delegate shall prescribe such regulations as may be necessary to prevent the avoidance of the employee benefit requirements listed in section 414(m)(4) through the use of separate service organizations.

PRIOR GUIDELINES
 
Initial guidelines under section 414(m) were set forth in Revenue Ruling 81-105, 1981-1 C.B. 256. Rev. Rul. 81-105 provided illustrations of how the provisions of section 414(m) operate by way of three examples. The rules set forth in Rev. Rul. 81-105 remain operative and are not affected by the promulgation of these proposed regulations.

Revenue Procedure 81-12, 1981-1 C.B. 652, prescribes procedures for (1) obtaining a ruling on whether two or more organizations are members of an affiliated service group, and (2) obtaining determination letters on the qualification, under section 401(a) or 403(a), of an employees' pension, profit-sharing, stock bonus, annuity, or bond purchase plan established by a member of an affiliated service group.

Home Resources Rev Proc 02-21

ADMINISTRATIVE EXEMPTIONS
 
Several parties have expressed concern that aggregation may be required under the rules of section 414(m)(2)(A) and (B) in situations where there has been no attempt to avoid the employee benefit requirements listed in section 414(m)(4).

Those parties noted that an organization qualifies as an A Organization whenever it is a shareholder or partner in the First Service Organization and regularly performs services for the First Service Organization or is regularly associated with the First Service Organization in performing services for third persons. Thus, aggregation will be required regardless of how small the interest is that the A Organization holds in the First Service Organization, irrespective of whether the services performed by the A Organization are of a type historically performed by employees in the service field of the First Service Organization, and even if the services performed for the First Service Organization only constitute an insignificant portion of the business of the A Organization.

However, section 414(m)(1) grants authority to promulgate regulations that specify when all the employees of an affiliated service group will not be treated as employed by a single employer. Accordingly, proposed Treasury Regulation Section 1.414(m)-1(c) provides that a corporation, other than a professional service corporation, will not be treated as a First Service Organization for purposes of section 414(m)(2)(A). Professional service corporations are not excepted from treatment as First Service Organizations for purposes of section 414(m)(2)(A) because the legislative history indicates that such corporations were intended to be covered. A special definition of professional service corporations is provided in the proposed regulation.

A corporation will still be treated as a First Service Organization for purposes of section 414(m)(2)(B). Thus, two corporations, neither of which is a professional service organization, will be aggregated only if one of the corporations satisfies the more stringent tests to be classified as a B Organization.

However, the Commissioner may determine that, in practice, the exception in the A Organization test for corporations, other than professional service corporations, results in an avoidance of the requirements of section 414(m) that circumvents Congressional intent. If such avoidance is found in a significant number of cases, this exception may be removed from the regulations.

Similarly, several parties have mentioned that aggregation may be required under section 414(m)(2)(B) whenever the owner of the potential B Organization acquires an interest in the First Service Organization (or in an A Organization), even though this interest is minimal and even though the owner does not have any other significant connection with the First Service Organization (i.e., the owner is not an officer or highly compensated employee of the First Service Organization).

Pursuant to the authority contained in section 414(m)(1), a special rule is provided for determining whether ten percent or more of the interests in the potential B Organization is held by officers, highly compensated employees, or owners of the First Service Organization (or of an A Organization). For this purpose, the interests held by persons who are owners of the First Service Organization and the B Organization (but who are not also officers or highly compensated employees of the First Service Organization), will be taken into account as owners of the First Service Organization only if they hold, in the aggregate, three percent or more of the interests in such First Service Organization.

There may be other situations, not covered by the special rules of the regulations, where aggregation should not be required although the organizations are described in the literal language of either section 414(m)(2)(A) or (B). Comments are solicited from the public as to what these rules should be.

 Home Resources Rev Proc 02-21

SIGNIFICANT PORTION
 
Proposed Treasury Regulation Section 1.414(m)-2(c)(2) provides that the determination of whether providing services for the First Service Organization, for one or more A organizations determined with respect to the First Service Organization, or for both, is a significant portion of the business of the potential B Organization will generally be based on the facts and circumstances. However, two specific rules are provided.

A safe harbor rule is provided under which the performance of services for the First Service Organization, for one or more A Organizations, or for both, will not be considered a significant portion of the business of a potential B Organization if the Service Receipts Percentage is less than five percent. The Service Receipts Percentage is the ratio of the gross receipts of the organization derived from performing services for the First Service Organization, for one or more A Organizations, or for both, to the total gross receipts of the organization derived from performing services. This ratio is the greater of the ratio for the year for which the determination is being made or for the three year period including that year and the two preceding years (or the period of existence of the organization, if less).

Except for a situation described in the preceding paragraph, the performance of services for the First Service Organization, for one or more A Organizations, or for both, will be considered a significant portion of the business of the potential B Organization if the Total Receipts Percentage is ten percent or more. The Total Receipts Percentage is calculated in the same manner as the Service Receipts Percentage, except that gross receipts in the denominator are determined without regard to whether they were derived from performing services.

Comments from the public are requested regarding these significant portion tests.

HISTORICALLY PERFORMED
 
Proposed Treasury Regulation Section 1.414(m)-2(c)(3) provides that services will be considered of a type historically performed by employees in a particular service field if it was not unusual for the services to be performed by employees of organizations in that service field in the United States on December 13, 1980 (the date of enactment of section 414(m)).

Home Resources Rev Proc 02-21

CONSTRUCTIVE OWNERSHIP
 
Proposed Treasury Regulation Section 1.414(m)-2(d)(2) provides that in determining ownership for purposes of section 414(m), an individual's interest under a plan that qualifies under section 401(a) will be taken into account. Comments from the public are requested concerning the appropriateness of this rule in cases in which the investment in employer securities by the plan results from an independent decision of the plan trustee.
 
ORGANIZATION
 
Proposed Treasury Regulation Section 1.414(m)-2(e) provides that the term "organization" includes a sole proprietorship. The proposed regulations do not consider the impact of sections 414(b) (controlled group of corporations) or 414(c)(group of trades or businesses under common control) on the definition of "organization" in Section 1.414(m)-2(e)(1). Specifically, the regulations do not consider the situation in which a particular organization is potentially part of both an affiliated service group and either a controlled group of corporations or a group of trades or businesses under common control. In such a situation, issues arise as to the order in which the determinations are made as to what constitutes a single employer. For example, whereas an individual corporation may be a service organization, the controlled group of which that corporation is a part may not be a service organization (or vice versa). Comments from the public are requested regarding the treatment of a controlled group of corporations or a group of trades or businesses under common control in this respect.
 
SERVICE ORGANIZATION
 
Proposed Treasury Regulation Section 1.414(m)-2(f) provides that the principal business of an organization will be considered the performance of services if capital is not a material income-producing factor for the organization. The test for determining whether or not capital is a material income-producing factor is similar to the test in Treasury Regulation Section 1.1348-3(a)(3)(ii), as in effect on February 25, 1983.

Numerous fields are listed in proposed Treasury Regulation Section 1.414(m)-2(f) as being service fields. Organizations engaged in a field not listed therein and in which capital is a material income-producing factor will not be considered to be service organizations until the first day of the first plan year beginning at least 180 days after the date of the publication of an official document (such as a revenue ruling) giving notice to the contrary. The Commissioner of Internal Revenue is granted authority to determine that certain organizations, or types of organizations, should not be considered as being subject to the requirements of section 414(m) even though the organizations are engaged in a field listed in the proposed regulation. Comments are requested from the public as to examples of organizations that should or should not be considered as being service organizations subject to the provisions of section 414(m).

Home Resources Rev Proc 02-21

MULTIPLE AFFILIATED SERVICES GROUPS
 
Proposed Treasury Regulation Section 1.414(m)-2(g) provides rules for multiple affiliated service groups. Two or more affiliated service groups will not be aggregated simply because an organization is an A Organization or a B Organization with respect to each affiliated service group. However, if an organization is a First Service Organization with respect to two or more A Organizations or two or more B Organizations, or both, all of the organizations will be considered to constitute a single affiliated service group.
 
SPECIAL QUALIFICATION REQUIREMENTS
 
Pursuant to the authority granted in section 414(m)(6), proposed Treasury Regulation Section 1.414(m)-3(b) provides that if a plan maintained by a member of an affiliated service group covers an employee described in section 401(c)(1) (self-employed individual), an owner-employee (as described in section 401(c)(3)), or a shareholder-employee (as described in section 1379(d)) the plan must also satisfy the special requirements relating to plans that cover those types of employees, to the extent those requirements apply, even though that individual is not employed by the member maintaining the plan. This provision only applies if such an employee's earned income or compensation received as a shareholder-employee is taken into account in computing contributions or benefits under the plan.
 
MULTIPLE EMPLOYER PLANS
 
Proposed Treasury Regulation Section 1.414(m)-3(c) provides that if a plan maintained by a member of an affiliated service group covers an individual who is not an employee of that member, but who is an employee of another member of that affiliated service group, the plan will be considered to be maintained by more than one employer for purposes of several provisions of section 413(c) (relating to plans maintained by more than one employer). This rule allows a member of the affiliated service group to deduct contributions on behalf of individuals who are not employed by that member.

However, this multiple employer plan rule does not apply in the case of a controlled group of corporations (as described in section 414(b)) or a group of trades or businesses under common control (as described in section 414(c)). Those situations will be governed by the special rules of section 414(b) or (c), respectively.

DISCRIMINATION
 
Proposed Treasury Regulation Section 1.414(m)-3(d) provides that in testing for discrimination under section 401(a)(4) (requiring that contributions or benefits do not discriminate in favor of employees who are officers, shareholders, or highly compensated), all of the compensation paid to an individual must be considered in determining the contributions or benefits on behalf of the individual under a plan maintained by a member of an affiliated service group, without regard to the percentage of the organization employing the individual owned by the member maintaining the plan.

Home Resources Rev Proc 02-21

EFFECTIVE DATES
 
In the case of a plan that was not in existence on November 30, 1980, section 414(m) applies to plan years ending after that date. In the case of a plan that was in existence on November 30, 1980, section 414(m) applies to plan years beginning after that date.

Proposed Treasury Regulation Section 1.414(m)-4(b)(1) provides that a defined contribution plan in existence on November 30, 1980 that fails to satisfy the requirements for qualification under section 401(a) solely because of the application of section 414(m) will be treated as continuing to satisfy the requirements of section 401(a) after the effective date of section 414(m) if the plan is terminated and all amounts are distributed to participants within 180 days after the latest of:

(i) [insert the date of the publication of this regulation in the Federal Register as a Treasury decision].

(ii) The date on which notice of the final determination with respect to a request for a determination letter is issued by the Internal Revenue Service, such request is withdrawn, or such request is finally disposed of by the Internal Revenue Service, provided the request for a determination letter was pending on [insert the date of the publication of this regulation in the Federal Register as a Treasury decision] or, in the case of a request for a determination letter on the plan termination, was made within 60 days after [insert the date of the publication of this regulation in the Federal Register as a Treasury decision], or

(iii) If a petition is timely filed with the United States Tax Court for a declaratory judgment under section 7476 with respect to the final determination (or the failure of the Internal Revenue Service to make a final determination) in response to such request, the date on which the decision of the United States Tax Court in such preceding becomes final.

Proposed Treasury Regulation Section 1.414(m)-4(b)(2) provides that a defined benefit plan in existence on November 30, 1980 that fails to satisfy the requirements for qualification under section 401(a) solely because of the application of section 414(m) will be treated as continuing to satisfy the requirements of section 401(a) after the effective date of section 414(m) if the plan is terminated and all amounts are distributed within the same period as that provided for defined contribution plans. However, deductions for contributions to the plan for plan years after the effective date of section 414(m) are limited to those necessary to satisfy the minimum funding standards of section 412.

Home Resources Rev Proc 02-21

RELIANCE ON PROPOSED REGULATIONS
 
Pending the adoption of final regulations, taxpayers may rely on the rules contained in this notice of proposed rulemaking and the Internal Revenue Service will issue determination, opinion, and ruling letters based on these rules. If any provisions of the final regulations are less favorable to taxpayers than these proposed rules, those provisions only will be effective for periods after adoption of the final regulations.

COMMENTS AND REQUESTS FOR A PUBLIC HEARING

Before adopting these proposed regulations, consideration will be given to any written comments that are submitted (preferably six copies) to the Commissioner of Internal Revenue. All comments will be available for public inspection and copying. A public hearing will be held upon written request to the Commissioner by any person who has submitted written comments. If a public hearing is held, notice of the time and place will be published in the Federal Register.

EXECUTIVE ORDER 12291 AND REGULATORY FLEXIBILITY ACT

The Commissioner has determined that this proposed regulation is not a major regulation for purposes of Executive Order 12291. Accordingly, a regulatory impact analysis is not required.

Although this document is a notice of proposed rulemaking which solicits public comments, the Internal Revenue Service has concluded that the regulations proposed herein are interpretative and that the notice of public procedure requirements of 5 U.S.C. 553 do not apply. Accordingly, these proposed regulations do not constitute regulations subject to the Regulatory Flexibility Act (5 U.S.C. chapter 6).

DRAFTING INFORMATION
 
The principal authors of these proposed regulations are Kirk F. Maldonado and Mary M. Levontin of the Employee Plans and Exempt Organizations Division of the Office of Chief Counsel, Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and Treasury Department participated in developing these regulations, both on matters of substance and style.
 
* * * * *
 
Proposed amendments to the regulations

The proposed amendments to 26 CFR Part 1 are as follows:

Paragraph 1. Paragraph (f) of section 1.105-11 is amended by striking out "section 414(b) and (c)" and inserting in lieu thereof "section 414(b), (c), or (m)."

Home Resources Rev Proc 02-21

Par. 2. The following new sections are added at the appropriate place:

Section 1.414(m)-1 Affiliated service groups.

(a) In general. Section 414(m) provides rules that require, in some circumstances, employees of separate organizations to be treated as if they were employed by a single employer for purposes of certain employee benefit requirements. For other rules requiring aggregation of employees of different organizations, see section 414(b) (relating to controlled groups of corporations) and section 414(c) (relating to trades or businesses under common control). If aggregation is required under either of the preceding provisions and also under section 414(m), the requirements with respect to all of the applicable provisions must be satisfied.

(b) Aggregation. Except as provided in paragraph (c), all the employees of the members of an affiliated service group shall be treated as if they were employed by a single employer for purposes of the employee benefit requirements listed in Section 1.414(m)-3.

(c) Aggregation not required. Pursuant to the authority contained in section 414(m)(1), a corporation, other than a professional service corporation, shall not be treated as a First Service Organization (see Section 1.414(m)-2) for purposes of section 414(m)(2)(A). Also, a special rule is provided in Section 1.414(m)-2(c)(4) for determining ownership under section 414(m)(2)(B). For purposes of this paragraph, a professional service corporation is a corporation that is organized under state law for the principal purpose of providing professional services and has at least one shareholder who is licensed or otherwise legally authorized to render the type of services for which the corporation is organized. "Professional services" means the services performed by certified or other public accountants, actuaries, architects, attorneys, chiropodists, chiropractors, medical doctors, dentists, professional engineers, optometrists, osteopaths, podiatrists, psychologists, and veterinarians. The Commissioner may expand the list of services in the preceding sentence. However, no such expansion will be effective with respect to any organization until the first day of the first plan year beginning at least 180 days after the publication of such change.

Home Resources Rev Proc 02-21

Section 1.414(m)-2 Definitions.

(a) Affiliated service group. "Affiliated service group" means a group consisting of a service organization (First Service Organization) and

(1) One or more A Organizations described in paragraph (b), or

(2) One or more B Organizations described in paragraph (c), or

(3) One or more A Organizations described in paragraph (b) and one or more B Organizations described in paragraph (c).

(b) A Organization--

(1) General rule. A service organization is an A Organization if it:

(i) Is a partner or shareholder in the First Service Organization (regardless of the percentage interest it owns in the First Service Organization but determined with regard to the constructive ownership rules of paragraph (d)); and

(ii) Regularly performs services for the First Service Organization, or is regularly associated with the First Service Organization in performing services for third persons.

It is not necessary that any of the employees of the organization directly perform services for the First Service Organization; it is sufficient that the organization is regularly associated with the First Service Organization in performing services for third persons.

(2) Regularly performs services for. The determination of whether a service organization regularly performs services for the First Service Organization or is regularly associated with the First Service Organization in performing services for third persons shall be made on the basis of the facts and circumstances. One factor that is relevant in making this determination is the amount of the earned income that the organization derives from performing services for the First Service Organization, or from performing services for third persons in association with the First Service Organization.

(3) Examples. The provisions of this paragraph may be illustrated by the following examples.

Example (1). A Organization.

(i) Attorney N is incorporated, and the corporation is a partner in a law firm. Attorney N and his corporation are regularly associated with the law firm in performing services for third persons.

(ii) Considering the law firm as a First Service Organization, the corporation is an A Organization because it is a partner in the law firm and it is regularly associated with the law firm in performing services for third persons. Accordingly, the corporation and the law firm constitute an affiliated service group.

Example (2). Corporation.

(i) Corporation F is a service organization that is a shareholder in Corporation G, another service organization. F regularly provides services for G. Neither corporation is a professional service corporation within the meaning of subsection (1)(c).

(ii) Neither corporation may be considered a First Service Organization for purposes of this paragraph and, thus, aggregation will not be required by operation of the A Organization test. However, G or F may be treated as a First Service Organization and the other organization may be a B Organization under the rules of subsection (2)(c).

Example (3). Regularly associated with.

(i) R, S & T is a law partnership with offices in numerous cities. The office in the city of D is incorporated, and the corporation is a partner in the law firm. All of the employees of the corporation work directly for the corporation, and none of them work directly for any of the other offices of the law firm.

(ii) Considering the law firm as a First Service Organization, the corporation is an A Organization because it is a partner in the First Service Organization and is regularly associated with the law firm in performing services for third persons. Accordingly, the corporation and the law firm constitute an affiliated service group.

Home Resources Rev Proc 02-21

(c) B Organizations--

(1) General rule. An organization is a B Organization if:

(i) A significant portion of the business of the organization is the performance of services for the First Service Organization, for one or more A Organizations determined with respect to the First Service Organization, or for both.

(ii) Those services are of a type historically performed by employees in the service field of the First Service Organization or the A Organizations, and

(iii) Ten percent or more of the interests in the organization is held, in the aggregate, by persons who are designated group members (as defined in subparagraph (4)) of the First Service Organization or of the A Organizations, determined using the constructive ownership rules of paragraph (d).

(2) Significant portion--

(i) General rule. Except as provided in subdivisions (ii) and (iii), the determination of whether providing services for the First Service Organization, for one or more A Organizations, or for both, is a significant portion of the business of an organization will be based on the facts and circumstances, Wherever it appears in this paragraph (2), "one or more A organizations" means one or more A organizations determined with respect to the First Service Organization.

(ii) Service Receipts safe harbor. The performance of services for the First Service Organizations, for one or more A Organizations, or for both, will not be considered a significant portion of the business of an organization if the Service Receipts Percentage is less than five percent.

(iii) Total Receipts threshold test. The performance of services for the First Service Organization, for one or more A Organizations, or for both, will be considered a significant portion of the business of an organization if the Total Receipts Percentage is ten percent or more.

(iv) Service Receipts Percentage. The Service Receipts Percentage is the ratio of the gross receipts of the organization derived from performing services for the First Service Organization, for one or more A Organizations, or for both, to the total gross receipts of the organization derived from performing services. This ratio is the greater of the ratio for the year for which the determination is being made or for the three year period including that year and the two preceding years (or the period of the organization's existence, if less).

(v) Total Receipts Percentage. The Total Receipts Percentage is calculated in the same manner as the Service Receipts Percentage, except that gross receipts in the denominator are determined without regard to whether they were derived from performing services.

Home Resources Rev Proc 02-21

(3) Historically performed. Services will be considered of a type historically performed by employees in a particular service field if it was not unusual for the services to be performed by employees of organizations in that service field (in the United States) on December 13, 1980.

[NOTE:  The following subparagraph is now obsolete.  Originally, IRC 414(m)(2)(B) said that at least "owners, highly compensation employees, or officers" of the First Service Organization or its A Organizations had to own at least 10% of the B Organization.  IRC 414(q) had not yet been adopted defining "highly compensated employees, and so the proposed regulations define the designated group of potential owners.  The 414(m) was amended, after the proposed regulations were presented, to refer to "highly compensated employees (within the meaning of section 414(q))."  Accordingly, all references in these regulations to "designated group" should instead refer to highly compensated employees as we now understand that term.  See Who's the Employer, Q13:8]

(4) Designated group--

(i) Definition. "Designated group" members are the officers, the highly compensated employees, and the common owners of an organization (as defined in subdivision (ii)). However, even though a person is not a common owner, the interests the person holds in the potential B Organization will be taken into account if the person is an officer or a highly compensated employee of the First Service Organization or of an A Organization.

(ii) Common owner. A person who is an owner of a First Service Organization or of an A Organization is a common owner if at least three percent of the interests in the organization is, in the aggregate, held by persons who are owners of the potential B Organization (determined using the constructive ownership rules of paragraph (d)).

(5) Owner. The term "owner" includes organizations that have an ownership interest described in paragraph (e).

(6) Aggregation of ownership interests. It is not necessary that a single designated group member of the First Service Organization or of an A Organization own ten percent or more of the interests, determined using the constructive ownership rules of paragraph (d), in the organization for the organization to be a B Organization. It is sufficient that the sum of the interests, determined using the constructive ownership rules of paragraph (d), held by all of the designated group members of the First Service Organization, and the designated group members of the A Organizations, is ten percent or more of the interests in the organization.

(7) Non-service organization. An organization may be a B Organization even though it does not qualify as a service organization under paragraph (f).

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(8) Examples. The provisions of this paragraph may be illustrated by the following examples.

Example (1). B Organization.

(i) R is a service organization that has 11 partners. Each partner of R owns one percent of the stock in Corporation D. The corporation provides services to the partnership of a type historically performed by employees in the service field of the partnership. A significant portion of the business of the corporation consists of providing services to the partnership.

(ii) Considering the partnership as a First Service Organization, the corporation is a B Organization because a significant portion of the business of the corporation is the performance of services for the partnership of a type historically performed by employees in the service field of the partnership, and more than ten percent of the interests in the corporation is held, in the aggregate, by the designated group members (consisting of the 11 common owners of the partnership). Accordingly, the corporation and the partnership constitute an affiliated service group.

[Note:  The distinction drawn in paragraph (iii) below is obsolete.  See the discussion of Designated Group above.]

(iii) A similar result would be obtained if no more than 8 percent of the 11 percent ownership in Corporation D were held by highly compensated employees of R who were not owners of R (even though no one group of the three preceding groups held 10 percent or more of the stock of Corporation D).

Example (2). Other aggregation rules.

(i) C, an individual, is a 60 percent partner in D, a service organization, and regularly performs services for D. C is also an 80 percent partner in F. A significant portion of the gross receipts of F are derived from providing services to D of a type historically performed by employees in the service field of D.

(ii) Viewing D as a First Service Organization, F is a B Organization because a significant portion of gross receipts of F are derived from performing services for D of a type historically performed by employees in that service field and more than ten percent of the interests in F is held by the designated group member C (who is a common owner of D). Accordingly, D and F constitute an affiliated service group. Additionally, the employees of D and F are aggregated under the rules of section 414(c). Thus, any plan maintained by a member of the affiliated service group must satisfy the aggregation rules of sections 414(c) and 414(m).

Example (3). Common owner.

(i) Corporation T is a service organization. The sole function of Corporation W is to provide services to Corporation T of a type historically performed by employees in the service field of Corporation T. Individual C owns all of the stock of Corporation W and two percent of the stock of Corporation T. C is not an officer or a highly compensated employee of Corporation T.

[Note:  This example is based on the obsolete definition of designated group.  However, the result would be the same under current law.]

(ii) Considering Corporation T as a First Service Organization, Corporation W is not a B Organization because it is not 10 percent owned by designated group members. Because C owns less than 3 percent of Corporation T, C is not a common owner of T.

Example (4). B Organization.

(i) Individual M owns one-third of an employee benefit consulting firm. M also owns one-third of an insurance agency. A significant portion of the business of the consulting firm consists of assisting the insurance agency in developing employee benefit packages for sale to third persons and providing services to the insurance company in connection with employee benefit programs sold to other clients of the insurance agency. Additionally, the consulting firm frequently provides services to clients who have purchased insurance arrangements from the insurance company for the employee benefit plans they maintain. The insurance company frequently refers clients to the consulting firm to assist them in the design of their employee benefit plans. The percentage of the total gross receipts of the consulting firm that represent gross receipts from the performance of these services for the insurance agency is 20 percent.

(ii) Considering the insurance agency as a First Service Organization, the consulting firm is a B Organization because a significant portion of the business of the consulting firm (as determined under the Total Receipts Percentage Test) is the performance of services for the insurance agency of a type historically performed by employees in the service field of insurance, and more than 10 percent of the interests in the consulting firm is held by owners of the insurance agency. Thus, the insurance agency and the consulting firm constitute an affiliated service group.

Example (5). B Organization.

(i) Attorney T is incorporated, and the corporation is a 6% shareholder in a law firm (which is also incorporated). All of the work of Corporation T is performed for the law firm.

[Note:  The following paragraph (ii) refers to the 267(c) attribution rules and to that extent is obsolete.  Attribution for traditional affiliated service groups is now based on the attribution rules of IRC 318.  However, under those rules, the same result would occur.  Moreover, under those rules, the T Corporation would be deemed to be an A Organization on these facts.]

(ii) Under the principles of section 267(c), T is deemed to own the shares of the law firm owned by T Corporation. Thus, T is a common owner of the law firm. Considering the law firm as a First Service Organization, Corporation T is a B Organization because a significant portion of the business of Corporation T consists of performing services for the law firm of a type historically performed by employees, and 100 percent of Corporation T is owned by a common owner of the law firm.

Example (6). Significant portion.

(i) The income of Corporation X is directed from both performing services and other business activities. The amount of its receipts derived from performing services for, and its total receipts derived from, Corporation Z and the total for all other customers is set forth below:

 

Origin of income Corporation Z All customers
Year 1 services $4 $100
     Total   $120
Year 2 services $9 $150
     Total   $180
Year 3 services $42 $200
     Total   $240

(ii) In year 1 (the first year of existence of Corporation X), the Services Receipts Percentage for Corporation X (for its business with Corporation Z) is less than five percent ($4/$100, or 4%). Thus performing services for Corporation Z will not be considered a significant portion of the business of Corporation X.

(iii) In year 2, the Services Receipts Percentage is the greater of the ratio for that year ($9/$150, or 6%) or for years 1 and 2 combined ($13/$250, or 5.2%), which is six percent. The Total Receipts Percentage is the greater of the ratio for that year ($9/$180, or 5%) or for years 1 and 2 combined ($13/$300, or 4.3%), which is five percent. Because the Services Receipts Percentage is greater than five percent and the Total Receipts Percentage is less than ten percent, whether performing services for Corporation Z constitutes a significant portion of the business of Corporation X is determined by the facts and circumstances.

(iv) In year 3, the Services Receipts Percentage is the greater of the ratio for that year ($42/$200, or 21%) or for years 1, 2, and 3 combined ($55/$450, or 12.2%), which is 21 percent. The Total Receipts Percentage is the greater of the ratio for that year ($42/$240, or 17.5%) or for years 1, 2, and 3 combined ($55/$540, or 10.1%), which is 17.5 percent. Because the Total Receipts Percentage is greater than ten percent and the Services Receipts Percentage is not less than five percent, a significant portion of the business of Corporation X is considered to be the performances of services for Corporation Z.

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([NOTE:  The following paragraph (d) is obsolete.  When it was written, Code section 414(m) reference to the section 267(c) attribution rules.  After these proposed regulations were presented, section 414(m) was amended to refer to the section 318(a) attribution rules.  For the most part, this paragraph (d) simply restates the 267(c) rules.  However, it does add one important principle which would apply to the current 318 system.  The last sentence of paragraph (1) notes that the attribution system applies to partnership interests as well as to stock.  In fact, it should probably refer to any ownership interest, including a beneficial interest in a trust.  For examples and information regarding these attribution rules, see Who's the Employer, Chapter 14.]

d) Ownership--

(1) Constructive ownership. Except as otherwise provided in the regulations under section 414(m), the principles of section 267(c) (relating to constructive ownership of stock) shall apply in determining ownership for purposes of section 414(m). Accordingly, the rules of section 267(c) shall apply to partnership interests as well as to stock.

(2) Qualified plans. In determining ownership for purposes of section 414(m), and individual's interest under a plan that qualifies under section 401(a) will be taken into account.

(3) Special rules. For purposes of section 414(m):

(i) Stock or partnership interests owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries;

(ii) An individual shall be considered as owning the stock or partnership interests owned, directly or indirectly, by or for his family;

(iii) An individual owning (otherwise than by the application of subdivision (ii)) any stock in a corporation or interest in a partnership shall be considered as owning the stock or partnership interests owned, directly or indirectly, by or for his partner;

(iv) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and

(v) Stock or partnership interests constructively owned by a person by reason of the application of subdivision (i) shall, for the purpose of applying subdivision (i), (ii), or (iii), be treated as actually owned by such person, but stock or partnership interests constructively owned by an individual by reason of the application of subdivision (ii) or (iii) shall not be treated as owned by him for the purpose of again applying either of such subdivisions in order to make another the constructive owner of such stock or partnership interests.

(4) Examples. The provisions of this paragraph may be illustrated by the following examples.

Example (1). Constructive ownership.

(i) Individual K is incorporated as K Corporation, and K Corporation is a partner in a management consulting firm K & F. K regularly performs services for the management consulting firm K & F. The secretarial services for the consulting firm are performed by Corporation M. A significant portion of the business of the secretarial corporation, M, consists of providing services to the consulting firm. All of the stock of the secretarial corporation, M, is owned by individual K.

(ii) Considering the consulting firm as a First Service Organization, Corporation K is an A Organization because it is a partner in the consulting firm and regularly performs services for the firm or is regularly associated with the firm in performing services for third persons.

(iii) Under the principles of section 267(c), individual K is deemed to own the partnership interest in the consulting firm that is held by K Corporation. Thus, K is considered to be an owner of the consulting firm.

(iv) Considering the consulting firm as a First Service Organization, the secretarial corporation is a B Organization because a significant portion of its business consists of performing services for the consulting firm or for Corporation K of a type historically performed by employees in the service field of management consulting, and at least ten percent of the interests in the secretarial corporation, M, is held by individual K, and owner of the consulting firm.

Example (2). Constructive ownership.

(i) J is the office manager and a highly compensated employee of an accounting partnership H & H. The secretarial services for the partnership are provided by Corporation W. J owns fifty percent of the stock of the secretarial corporation. A significant portion of the business of the secretarial corporation consists of providing services to the partnership.

(ii) Considering the partnership as a First Service Organization, the secretarial corporation is a B Organization because a significant portion of the business of the secretarial corporation is the performance of services for the partnership of a type historically performed by employees of accounting firms, and more than ten percent of the interests in the corporation is held by a highly compensated employee of the partnership.

(iii) Under the principles of section 267(c), the result would be the same, for example, if the stock were held (instead of by J) by the spouse of J the children of J, the parents or grandparents of J, a trust for the benefit of J's children, or by a combination of such relatives.

Example (3). Qualified plan.

(i) T is the chief executive officer of W Corporation, which is a consulting firm. T is also a participant in the W Corporation Profit-Sharing Plan, which qualifies under section 401(a). T's account balance in the plan is $150,000, and it consists of 25 percent of the stock of X Corporation. The sole function of X Corporation is to provide secretarial services to W Corporation.

(ii) Considering W Corporation as a First Service Organization, X Corporation is a B Organization because a significant portion of the business of X Corporation consists of providing secretarial services to W Corporation, secretarial services are of a type historically performed by employees in the field of consulting, and 25 percent of the stock of X Corporation is considered to be owned by T, a highly compensated employee of W Corporation, using the principles of section 267(c). Accordingly, W Corporation and X Corporation constitute an affiliated service group.

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(e) Organization--

(1) General rule. The term "organization" includes a sole proprietorship, partnership, corporation, or any other type of entity, regardless of its ownership format.

(2) Special rule. Reserved.

(f) Service organization--

(1) Non-capital intensive organizations. The principal business of an organization will be considered the performance of service if capital is not a material income producing factor for the organization, even though the organization is not engaged in a field listed in subparagraph (2). Whether capital is a material income-producing factor must be determined by reference to all the facts and circumstances of each case. In general, capital is a material income-producing factor if a substantial portion of the gross income of the business is attributable to the employment of capital in the business, as reflected, for example, by a substantial investment in inventories, plant, machinery, or other equipment. Additionally, capital is a material income-producing factor for banks and similar institutions. However, capital is not a material income-producing factor if the gross income of the business consists principally of fees, commissions, or other compensation for personal services performed by an individual.

(2) Specified fields. Regardless of whether subparagraph (1) applies, an organization engaged in any one or more of the following fields is a service organization:

(i) Health;

(ii) Law;

(iii) Engineering;

(iv) Architecture;

(v) Accounting;

(vi) Actuarial science;

(vii) Performing arts;

(viii) Consulting; and

(ix) Insurance.

Notwithstanding the preceding sentence, an organization will not be considered to be performing services merely because it is engaged in the manufacture or sale of equipment or supplies used in the above fields, or merely because it is engaged in performing research or publishing in the above fields. An organization will not be considered to be a service organization under this subparagraph (2) merely because an employee provides one of the enumerated services to the organization or to other employees of the organization unless the organization is also engaged in the performance of the same service for third parties.

(3) Other organizations. Organizations engaged in performing services and that are not described in subparagraph (1) or (2) shall not be considered to be service organizations. The Commissioner may expand the list of fields contained in subparagraph (2). However, no such expansion will be effective until the first day of the first plan year beginning at least 180 days after the publication of such change.

(4) Exempted organizations. The Commissioner may determine that certain organizations, or types of organizations, should not be considered as subject to the requirements of section 414(m), even though the organizations are described in subparagraph (1) or (2).

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(g) Multiple affiliated service groups--

(1) Multiple First Service Organizations. Two or more affiliated service groups will not be aggregated simply because an organization is an A Organization or a B Organization with respect to each affiliated service group.

(2) Multiple A or B Organizations. If an organization is a First Service Organization with respect to two or more A Organizations or two or more B Organizations, or both, all of the organizations shall be considered to constitute a single affiliated service group.

(3) The provisions of this paragraph may be illustrated by the following examples.

Example (1). Multiple First Service Organizations.

(i) Corporation P provides secretarial service to numerous dentists in a medical building, each of whom maintains his own separate unincorporated practice. Dentist T owns 20 percent of the secretarial corporation and accounts for 20 percent of its gross receipts. Dentist W owns 25 percent of the corporation and accounts for 25 percent of its gross receipts.

(ii) Considering Dentist T as a First Service Organization, the secretarial corporation, P, is a B Organization because 20 percent of the gross receipts of the corporation are derived from performing services for Dentist T of a type historically performed by employees of dentists, and 20 percent of the interests in the corporation is owned by Dentist T. Accordingly, Dentist T and the corporation constitute an affiliated service group.

(iii) Considering Dentist W as a First Service Organization, the secretarial corporation, P, is a B Organization because 25 percent of the gross receipts of the corporation are derived from performing services for Dentist W of a type historically performed by employees of dentists, and 25 percent of the interests in the corporation is owned by Dentist W. Accordingly, Dentist W and the corporation constitute an affiliated service group. However, this affiliated service group does not include Dentist T even though the secretarial corporation, P, is a B Organization with respect to both dentists. Thus, there are two affiliated service groups.

Example (2). Multiple B Organizations.

(i) Doctor N is incorporated as Corporation N. Secretarial services are provided to Corporation N by Corporation Q. Corporation N owns 20 percent of the interests in the secretarial corporation and provides 20 percent of its gross receipts. Nursing services are provided to Corporation N by Corporation R. Corporation N owns 25 percent of the interests in the nursing corporation and provides 25 percent of its gross receipts.

(ii) Considering Corporation N as a First Service Organization, the secretarial corporation, Q, is a B Organization because 20 percent of the gross receipts of the secretarial corporation, Q, are derived from performing services for Corporation N of a type historically performed by employees of doctors, and 20 percent of the secretarial corporation is owned by the owner of Corporation N. Accordingly, Corporation N and the secretarial corporation, Q, constitute an affiliated service group.

(iii) Considering Corporation N as a First Service Organization, the nursing corporation, R, is a B Organization because 25 percent of the gross receipts of the nursing corporation, R, are derived from performing services for Corporation N of a type historically performed by employees of doctors, and 25 percent of the nursing corporation is owned by the owner of Corporation N. Accordingly, Corporation N and the nursing corporation constitute an affiliated service group.

(iv) For purposes of section 414(m), there will be considered to be one affiliated service group consisting of Corporation N, the secretarial corporation, Q, and the nursing corporation, R.

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Section 1.414(m)-3 Employee benefit requirements.

[NOTE:  Subsequent amendments to the Code have added the following items to the list of provision affected by 414(m):

  1. Section 401(a)(17), dealing with compensation limitations,
  2. Section 401(a)(26), dealing with participation requirements for defined benefit plans,
  3. Section 416, the top heavy rules, and
  4. All the welfare benefit requirements listed in Section 414(t).

Although 414(m) no longer refers directly to section 105(h) or 125, those sections are both still affected by the affiliated service group rules.  See sections 105(h)(8) and 414(t).  For more information about the effects of the affiliated service group rules, see Who's the Employer, chapters 10 and 13.]

(a) Employee benefit requirements affected. All of the employees of the members of an affiliated service group shall be treated as employed by a single employer for purposes of the following employee benefit requirements:

(1) Sections 401(a)(3) and 410 (relating to minimum participation requirements);

(2) Section 401(a)(4) (requiring that contributions or benefits do not discriminate in favor of employees who are officers, shareholders, or highly compensated);

(3) Sections 401(a)(7) and 411 (relating to minimum vesting standards);

(4) Sections 401(a)(16) and 415 (relating to limitation on contributions and benefits);

(5) Section 408(k) (relating to simplified employee pensions);

(6) Section 105(h) (relating to self-insured medical reimbursement plans);

(7) Section 125 (relating to cafeteria plans); and

[Note: The reference to section 414(m)(6) in paragraph (8) below is now obsolete.  It should instead refer to section 414(o).]

(8) Pursuant to the authority granted in section 414(m)(6), section 401(a)(10) (relating to plans providing contributions or benefits to owner-employees).

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[Note:  The following provision is obsolete.  Section 401(a)(9) is now of general applicability and is not particularly affected by the affiliated service group rules.  401(a)(17) is now applicable by statute to all affiliated service groups (see note above).  401(a)(18) has been repealed.]

(b) Special requirements. If a plan maintained by a member of an affiliated service group covers an employee described in section 401(c)(1) (self-employed individual), an owner-employee within the meaning of section 401(c)(3), or a shareholder-employee within the meaning of section 1379(d), the plan must also satisfy the following requirements to the extent they apply:

(1) Section 401(a)(9) (relating to special distribution requirements for plans benefiting self-employed individuals);

(2) Section 401(a)(17) (relating to a limitation on the compensation base of plans benefiting self-employed individuals or shareholder-employees); and

(3) Section 401(a)(18) (relating to special requirements for defined benefit plans benefiting self-employed individuals or shareholder-employees).

Pursuant to the authority granted in section 414(m)(6), a plan that covers a self-employed individual, an owner-employee, or a shareholder-employee will be subject to the preceding requirements, even though that individual is not employed by the member of the affiliated service group maintaining the plan. These requirements apply only if the earned income of the self-employed individual or owner-employee or the compensation received as a shareholder-employee is taken into account in computing contributions or benefits under the plan.

(c) Multiple employer plans--

[Note:  The last sentence of paragraph (1) below is obsolete.  It correctly described the operation of section 413(c)(6) at the time it was written.  However, 413(c)(6) has since been amended to provide that, in general, "In the case of a plan established after December 31, 1988, each applicable limitation provided by section 404(a) shall be determined as if each employer were maintaining a separate plan."  Accordingly, only plans established before 1989 can rely on the interpretation in the last sentence of paragraph (1) below.  For a chart showing how deductions are now handled, and a complete discussion of this issue, see Who's the Employer Q13:24.]

(1) General rule. If a plan maintained by a member of an affiliated service group covers an individual who is not an employee of that member, but who is an employee of another member of that affiliated service group, the plan will be considered to be maintained by the member that does employ that individual. Thus, the plan will be considered to be maintained by more than one employer for purposes of section 413(c)(2) (relating to the exclusive benefit rule), (4) (relating to funding), (5) (relating to liability for funding tax), and (6) (relating to deductions). Therefore, a member of an affiliated service group may deduct contributions on behalf of individuals who are not employees of that member, if the individuals are employed by another member of that affiliated service group.

(2) Special rule. The multiple employer plan rule contained in subparagraph (1) shall not apply in the case of a controlled group of corporations (as described in section 414(b)) or a group of trades or businesses under common control (as described in section 414(c)).

(d) Discrimination. In testing for discrimination under section 401(a)(4) (requiring that contributions or benefits do not discriminate in favor of employees who are officers, shareholders, or highly compensated), all of the compensation paid to an employee must be considered in determining the contributions or benefits under a plan maintained by a member of an affiliated service group, without regard to the percentage of the organization employing the individual owned by the member maintaining the plan.

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(e) Example. The provisions of this section may be illustrated by the following example.

(1) T is incorporated and Corporation T is a partner in a service organization. Corporation T employees only its sole shareholder and maintains a retirement plan. W and Z, the other partners in the service organization, are not incorporated. Each partner has a one-third interest in the service organization. The partnership has eight common law employees.

(2) Considering the partnership as a First Service Organization, Corporation T is an A Organization because it is a partner in the First Service Organization and regularly performs services for the partnership or is regularly associated with the partnership in performing services for third persons. Accordingly, the partnership and Corporation T constitute an affiliated service group.

[Note:  The conclusion reached in the paragraph below relating the deductibility of contributions is now obsolete.  See the note at paragraph (c) above.]

(3) If the retirement plan maintained by Corporation T covers any of the common law employees of the partnership, it will be benefiting individuals who are not employees of the member of the affiliated service group maintaining the plan (Corporation T). As such, the plan will be considered to be maintained by more than one employer, and will be subject to the rules of section 413(c)(2), (4), (5), and (6) and the regulations thereunder. Thus, contributions by Corporation T on behalf of these individuals will not fail to be deductible under section 404 merely because they are not employees of Corporation T. In testing for discrimination under section 401(a)(4), all of the compensation paid to the employees of the partnership must be taken into account in determining their contributions or benefits under the plan, without regard to the percentage of the partnership owned by Corporation T.

(4) If the plan maintained by Corporation T covers partners W and Z, the plan must also satisfy the requirements listed in paragraph (b), to the extent they are applicable.

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Section 1.414(m)-4 Effective dates.

(a) Effective dates--

(1) New plans. In the case of a plan that was not in existence on November 30, 1980, section 414(m) and the regulations thereunder apply to plan years ending after November 30, 1980.

(2) Existing plans. In the case of a plan in existence on November 30, 1980, section 414(m) and the regulations thereunder shall apply to plan years beginning after November 30, 1980.

(b) Frozen plans--

(1) Defined contribution plans. In the case of a defined contribution plan in existence on November 30, 1980, that fails to satisfy the requirements of section 401(a) solely because of the application of section 414(m), the trust shall be treated as continuing to satisfy the requirements of section 401(a) after the effective date of section 414(m) if the plan is terminated and all amounts are distributed to the participants within 180 days after the latest of:

(i) [insert the date of the publication of this regulation in the Federal Register as a Treasury decision],

(ii) The date on which notice of the final determination with respect to a request for a determination letter is issued by the Internal Revenue Service, such request is withdrawn, or such request is finally disposed of by the Internal Revenue Service, provided the request for a determination letter was pending on [insert the date of the publication of this regulation in the Federal Register as a Treasury decision] or, in the case of a request for a determination letter on the plan termination, was made within 60 days after [insert the date of the publication of this regulation in the Federal Register as a Treasury decision].

(iii) If a petition is timely filed with the United States Tax Court for a declaratory judgment under section 7476 with respect to the final determination (or the failure of the Internal Revenue Service to make a final determination) in response to such request, the date on which the decision of the United States Tax Court in such proceeding becomes final.

(2) Defined benefit plans. In the case of a defined benefit plan in existence on November 30, 1980, that fails to satisfy the requirements of section 401(a) solely because of the application of section 414(m), the trust shall be treated as continuing to satisfy the requirements of section 414(m) if the plan is terminated within 180 days after the latest of the dates determined in a manner consistent with paragraph (b)(1). However, deductions for contributions to the plan for plan years after the effective date of section 414(m) are limited to those necessary to satisfy the minimum funding standards of section 412.

Par. 3. Paragraph (c) of Section 1.415-8 is amended by adding "or by an affiliated service group (within the meaning of section 414(m))" before the words "is deemed maintained."

Roscoe L. Egger, Jr., Commissioner of Internal Revenue.

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Copyright 2005, S. Derrin Watson.  All rights reserved.