Category Archives: Common Control Issues

CalSavers: Employers Should Remain Compliance-Ready, Despite Court Challenges

Effective June 30, 2020, California employers with 100 or more employees, that do not maintain or contribute to a retirement plan, must participate in the CalSavers Program, by forwarding salary deferral contributions to the Program on behalf of most employees.  The CalSavers Program expands to employers with between 50 and 99 employees on June 30, 2021, and to employers with 5 or more employees on June 30, 2022, again presuming that the employer does not have a retirement plan in place  Employers of any size may voluntarily participate in CalSavers at the current time, and self-employed individuals, including those in the gig economy, may enroll effective September 1, 2019.

How do business owners count employees in order to determine their applicable CalSavers effective date?  What is the impact, if any, of being part of a “controlled group” of businesses, or of using a staffing or payroll agency?  What about out-of-state employers, or California-based employers with out-of-state employees? Below we do a “deep dive” on these and other CalSavers employer coverage issues.  For more information, you can also check our prior post on CalSavers.

Before we get to the details, CalSavers has not cleared all legal obstacles in its path as of this writing. The U.S. Department of Justice has stated that it is considering intervening in the federal court case over whether ERISA preempts CalSavers, and has asked for additional time, to September 13, 2019, to make its decision. CalSavers earlier survived a preemption challenge brought by the Howard Jarvis Taxpayers Association, succeeding in having the complaint dismissed, but the Association filed an amended complaint. The court’s decision on the amended complaint was pending when the Department of Justice got involved. We will continue to track the pending court challenge to CalSavers and update you on future developments.

  1. How do I count employees to determine when my business is subject to CalSavers? To determine employee headcount, take the average number of employees that your business reported to EDD for the quarter ending December 31 and the previous three quarters, counting full- and part-time employees.  California Code of Regulations Title 10, § 1001(a) (2019). So, for example, if you reported over 100 employees to EDD for the quarter ending December 31, 2019 and the previous three quarters, combined, you would need to register your business with CalSavers on June 30, 2020.
  2. What if my business is part of a controlled group of corporations? The CalSavers regulations do not address this issue. They appear to require each business with a separate federal EIN/California payroll tax account number to register or opt-out of the program.   So, for example, if your business has 25 employees but you are part of a controlled group that includes over 100 employees, and there is no controlled group plan in place, you would not need to register with CalSavers on June 30, 2020. This would also be the case if your business is part of a group of trades or businesses under common control (e.g. business types other than corporations), or an affiliated service group.
  3. What if my business contributes to a controlled group 401(k) plan or other retirement plan? Does my business qualify for the CalSavers exemption? If your business is part of a controlled group and contributes to the controlled group retirement plan on behalf of its employees the CalSavers exemption should apply, as it includes businesses that either “maintain” or “contribute to” a retirement plan. Cal. Code Regs. tit. 10, § 1000(m) (2019). The answer is the same if you are part of a group of trades or businesses under common control, or affiliated service group, that sponsors the retirement plan.
  4. What if my business is part of a controlled group, and the controlled group maintains a plan, but the plan excludes my business and my employees cannot participate? CalSavers personnel have informally stated that the CalSavers exemption applies even in this situation, because the business is still part of a controlled group that maintains a plan. Businesses that maintain their own plan, but that exclude a subset of employees from the plan (within the requirements of minimum coverage and nondiscrimination testing), even a majority of employees, are also exempt, per informal CalSavers commentary.  In such situations, an exempt employer cannot enroll their business in CalSavers voluntarily but can forward employee contributions on behalf of employees who have established a CalSavers account through prior employment.
  5. How do I do the employee headcount if my business uses a staffing agency or payroll company? Whether the staffing agency/payroll company or its “client” – your business – is the employer for headcount purposes depends upon what type of agency is involved. The CalSavers regulations refer to a“Tri-Party Employment Relationship,” which means that the employer enters into a service contract with a third-party entity for services including, but not limited to, payroll, staffing (both temporary and non-temporary), human resources, and employer compliance with laws and regulations. That category is further sub-divided into four categories.
  6. What categories of staffing/payroll companies do the CalSavers rules identify? The CalSavers rules refer to the following: Temporary Agencies, Leasing Agencies, Professional Employer Organizations or PEOs, and Motion Picture Payroll Services Companies. The basic rule is that the agency is the employer if you use a temporary agency or leasing agency, but your business is the employer for CalSavers headcount purposes if you use a PEO or Motion Picture Payroll Services Company. However, conditions apply! More details are provided in following questions.

Important Note: the Tri-Party Employment Relationship categories overlap to some degree, but not entirely, with federal rules governing who an employer is under ERISA employment benefit plans. The discussion here applies only to determining coverage under the CalSavers Program. For more information on ERISA benefit plan coverage issues raised by staffing agency and payroll company workers, see S. Derrin Watson’s treatise, Who’s the Employer esource, chapters 3, 5, and 6.

  1. What is a temporary agency or leasing agency for purposes of the CalSavers rules? California Unemployment Insurance Code § 606.5 (b) defines a temporary services employer or leasing employer as a business that does all of the following:
  • Negotiates with clients or customers for such matters as time, place, type of work, working conditions, quality, and price of the services.
  • Determines assignments or reassignments of workers, even though workers retain the right to refuse specific assignments.
  • Retains the authority to assign or reassign a worker to other clients or customers when a worker is determined unacceptable by a specific client or customer.
  • Assigns or reassigns the worker to perform services for a client or customer.
  • Sets the rate of pay of the worker, whether or not through negotiation.
  • Pays the worker from its own account or accounts.
  • Retains the right to hire and terminate workers.

If your business uses a temporary or leasing agency you should review the terms of your services agreement with them and confirm that it meets all of these requirements. If it does not, please see the response to Question 10.

  1. What is a PEO for purposes of the CalSavers rules? The CalSavers rule incorporate the definition found in Section 7705(e)(2) under the Internal Revenue Code, which describes a PEO as a business that does all of the following:
  • assumes responsibility for payment of wages to such individual, without regard to the receipt or adequacy of payment from the customer for such services,
  • assumes responsibility for reporting, withholding, and paying any applicable taxes [ . . . ] with respect to such individual’s wages, without regard to the receipt or adequacy of payment from the customer for such services,
  • assumes responsibility for any employee benefits which the service contract may require the certified professional employer organization to provide, without regard to the receipt or adequacy of payment from the customer for such benefits,
  • assumes responsibility for recruiting, hiring, and firing workers in addition to the customer’s responsibility for recruiting, hiring, and firing workers,
  • maintains employee records relating to such individual, and
  • agrees to be treated as a certified professional employer organization for purposes of section 3511 with respect to such individual.

If your business uses a PEO you should review the terms of your services agreement with them and confirm that it meets all of these requirements. If it does not, please see the response to Question 10.

  1. What is a Motion Picture Payroll Services Company for purposes of the CalSavers rules? If a payroll services company in the motion picture industry meets all of the following criteria as set forth in California U.I. Code § 679(f)(4), then the “employer” is the client motion picture production company:
  • Contractually provides the services of motion picture production workers to a motion picture production company or to an allied motion picture services company.
  • Is a signatory to a collective bargaining agreement for one or more of its clients.
  • Controls the payment of wages to the motion picture production workers and pays those wages from its own account or accounts.
  • Is contractually obligated to pay wages to the motion picture production workers without regard to payment or reimbursement by the motion picture production company or allied motion picture services company.
  • At least 80 percent of the wages paid by the motion picture payroll services company each calendar year are paid to workers associated between contracts with motion picture production companies and motion picture payroll services companies.

If your business uses a motion picture payroll services company you should review the terms of your services agreement with them and confirm that it meets all of these requirements. If it does not, please the response to Question 10.

  1. What if my business uses a third party staffing or payroll arrangement that does not fall within any of those definitions? In such instance, your business will be considered the employer for California payroll tax purposes per California Unemployment Insurance Code § 606.5(c), and likely for CalSavers employer coverage (employee headcount) purposes. The cited Unemployment Insurance Code section clarifies that the staffing or payroll company is considered a mere agent of your business in such instances, and is not a separate employing entity for payroll tax purposes.
  2. Does CalSavers apply to out-of-state employers? An employer’s eligibility is based on the number of California employees it employs. Eligible employees are any individuals who have the status of an employee under California law, who receive wages subject to California taxes, and who are at least 18 years old. If an out-of-state employer has more than 100 employees meeting that description, then as of June 30, 2020 it would need to either sponsor a retirement plan, or register for CalSavers.
  3. Does CalSavers apply to businesses located in California, with workers who perform services out of state? Yes, if the employer is not otherwise exempt, and if they have a sufficient number of employees who have the status of an employee under California law, who receive wages subject to California taxes, and who are at least 18 years old.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose.  (c) 2019 Christine P. Roberts, all rights reserved.

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Filed under Affiliated Service Groups, CalSavers Program, Common Control Issues, Controlled Groups, Gig Economy, Payroll Issues, Payroll Services, Professional Employer Organizations, Staffing Agencies, State Auto-IRA Programs

You Just Formed a New Business Entity. What Could Possibly Go Wrong?

What if a somewhat arcane area of tax law had potentially serious ramifications for attorneys and other tax advisors across a broad range of practices, but was not consistently identified and planned for in actual practice? That is an accurate description of the rules surrounding “controlled group” status between two or more businesses, which I have seen arise in business formation/transactions, estate planning, employment and family law settings.  The purpose of this overview is to briefly survey controlled group rules for non-ERISA practitioners, so that they can become aware of the potential complications that controlled group rules can create.

  1. Why Do Controlled Groups Matter?

The main reason they matter is because the IRS treats separate businesses within a controlled group as a single employer for almost all retirement and health benefit plan purposes. In fact, annual reporting for retirement plans (and for health and welfare plans with 100 or more participants) requires a statement under penalty of perjury as to whether the employer is part of a controlled group.  Therefore controlled groups are most frequently a concern where business entities have employees and particularly when they sponsor benefit plans, whether retirement/401(k), or health and welfare plans.  Note, however, that creation of a business entity that has no employees can still create a controlled group issue when it acts as a conduit to link ownership of two or more other entities that do have employees.

Being part of a controlled group does not always mean that all employees of the member companies have to participate in the same benefit plan (although it can sometimes mean that). However it generally means that separately maintained retirement plans have to perform nondiscrimination testing as if they were combined, which not infrequently means that one or more of the plans will fail nondiscrimination testing.  This is an event that usually requires the employer sponsoring the plan to add more money to the plan on behalf of some of the additional counted employees, or to pay penalty taxes in relation to same.  Similar complications can arise in Section 125 cafeteria or “flexible benefit plans,” and for self-insured group health plans, which are subject to nondiscrimination requirements under Code § 105(h).  Nondiscrimination rules are meant to apply to insured group health plans under the Affordable Care Act (“ACA”), so additional complications could arise in that context when and if the rules are enforced by the IRS, following publication of regulatory guidance.

Controlled group status can also mean that several small employers together comprise an “applicable large employer” subject to the ACA “pay or play rules,” and related annual IRS reporting duties. Small employer exceptions under other laws, including COBRA and the Medicare Secondary Payer Act, reference controlled group status when determining eligibility for the exception.

  1. How Do I Identify a Controlled Group?

 Determining controlled group status requires synthesizing regulations and other guidance across multiple Internal Revenue Code (“Code”) provisions and therefore is a task for a specialized ERISA or tax practitioner.  What follows are very simplified definitions aimed at helping advisors outside that specialized area flag potential controlled group issues for further analysis.

Strictly speaking, the term “controlled group” refers to shared ownership of two or more corporations, but this article uses the term generically as it is the more familiar term.  “Ownership” in this context means possession of the voting power or value of corporate stock (or a combination thereof).  Shared ownership among other types of business entities is described as “a group of trades or businesses under ‘common control.’”  Ownership in this context refers to ownership of a capital or profits interest in a partnership or LLC taxed as a partnership.   Controlled groups can also arise in relation to tax-exempt entities, for instance if they own 80% or more of a for-profit entity, or even between two tax-exempt entities where there is substantial overlap of board membership or board control.

Complex interest exclusion rules mean that not all ownership interests are counted towards common control; exclusion may turn on the nature of the interest held (e.g., treasury or non-voting preferred stock) or on the party holding the ownership interest (e.g, the trust of a tax-qualified retirement plan).

The two main sub-types of controlled group are: parent-subsidiary, and “brother-sister,” although a combination of the two may also exist.  A parent-subsidiary controlled group exists when one business owns 80% or more of another business, or where there is a chain of such ownership relationships. As that is a fairly straightforward test, I will focus on the lesser known, but more prevalent, brother-sister type of controlled group.

A brother-sister controlled group exists when the same five or fewer individuals, trusts, or estates (the “brother-sister” group) have a “controlling interest” in, and “effective control” of, two or more businesses.

  • A controlling interest exists when the brother-sister group members own, or are deemed to own under rules of attribution, at least 80% of each of the businesses in question.
  • Effective control exists when the brother-sister group owns or is deemed to own greater than 50% of the businesses in question, looking only at each member’s “lowest common denominator” ownership interest. (So, a group member that owed 20% of one business and 40% of another business would be credited only with 20% in the effective control test.)
  • In order to pass the 80% test, you must use the interests of the same five or fewer persons (or trusts or estates) used for purposes of the greater than 50% test.  See US v. Vogel Fertilizer, 455 US 16 (1982). Put otherwise, the two tests consider only owners with a greater-than-zero interest in each of the businesses under consideration. If, under this rule, you disregard shares adding up to more than 20% of a business, the 80% test won’t be met and that business generally won’t form part of the controlled group. (Although the remaining businesses may do so.)

The controlled group attribution rules are quite complex and can only be touched on here. Very generally speaking, an ownership interest may be attributed from a business entity to the entity’s owner, from trusts to trust beneficiaries (and to grantors of “grantor” trusts as defined under Code § 671-678), and among family members. Stock options can also create attributed ownership under some circumstances.  The attribution rules can have surprising consequences. For instance, a couple, each with his or her wholly-owned corporation, will be a controlled group if they have a child under age 21 together, regardless of their marital status, because the minor child is attributed with 100% of each parent’s interests under Code §1563(e)(6)(A).  Community property rights may also give rise to controlled group status. Careful pre-marital planning may be necessary to prevent unintended controlled group status among businesses owned separately by the partners to the marriage.

This is the first part of a two-part discussion that was first published as an article in the Santa Barbara Lawyer Magazine for October 2017.  The second half will address a variation of these rules that are specific to businesses formed by doctors, dentists, accountants, and other service providers.

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Filed under 401(k) Plans, ADP and ACP Testing, Affordable Care Act, Benefit Plan Design, Cafeteria Plans, COBRA, Common Control Issues, Employer Shared Responsibility, ERISA, Health Care Reform, Nondiscrimination Rules for Insured Health Plans, Nondiscrimination Testing for Qualified Retirement Plans, Plan Reporting and Disclosure Duties

It’s Time for ALEs to “Do the Math” on Controlled Group Status

Applicable Large Employers (ALEs) subject to the ACA’s employer shared responsibility and reporting duties are running out of time in which to ascertain whether or not they are part of an “Aggregated ALE Group,” the members of which are treated as a single employer for benefit plan and certain ACA purposes. This in turn requires an analysis under Internal Revenue Code controlled group rules, as discussed below.

A definitive answer to the question of aggregated group status is required in order to file the Form 1094-C transmittal for employee statements (Forms 1095-C), which is due in hard copy by May 31, 2016, or via e-filing by June 30, 2016. (E-filing is encouraged for all ALEs but is mandated for those filing 250 or more Form 1095-C employee statements).

Specifically, Part II of Form 1094-C, line 21 asks whether the “ALE Member” filing the Form is part of an “Aggregated ALE Group,” and if the answer is yes, the ALE Member must identify, in Part III, the name and EIN of all other ALE Members of the Aggregated ALE Group.  Form 1094-C, like other IRS forms, must be signed under penalty of perjury.

Some ALEs with fewer than 50 full-time employees, including full-time equivalents (FTEs), are subject to employer shared responsibility only because they are part of an Aggregated ALE Group that collectively employs 50 or more full-time/FTE employees (or, in 2015, 100 or more).

Larger employers that have always had 100 or more full-time/FTE employees of their own may also have had to determine their status as part of an Aggregated ALE Group in order to determine who should furnish Form 1095-C employee statements for employees who worked for more than one aggregated employer during the same calendar month. (Generally the employer for whom the employee worked the most hours of service would be considered the reporting employer for that month.)

In either situation, these ALEs should already know that they are members of an Aggregated ALE Group and be in a position to identify other members of the Group on Part III of Form 1094-C.

However, employers that have always had 100 or more full-time/FTE employees of their own, and who have not shared employees with other group members as described above, may not have had occasion to determine whether or not they are part of an Aggregated ALE Group with other companies related in ownership. Now they must do so in order to accurately complete Form 1094-C.

In addition to Form 1094-C reporting duties, accurate knowledge of controlled group status is necessary in the event an ALE is subject to excise tax penalties under Internal Revenue Code (“Code”) § 4980H(a).  Before applying the excise tax rate ($270 per month, in 2016) to all full-time employees, the ALE may subtract the first 30 full-time employees.  That “budget” of 30 excludible full-time employees (80, in 2015) must be allocated among members of the Aggregated ALE Group in proportion to their total number of full-time employees.[1]

The three types of Aggregated ALE Groups are:

  • a “controlled group” consisting solely of corporations as defined under Code § 414(b);
  • a group of trades or businesses that includes partnerships and LLCs, that are under “common control” as defined under Code § 414(c); or
  • businesses, usually professional service organizations, that together form an “affiliated service group” (ASG) as defined under Code § 414(m).

The controlled group/common control/ASG rules (collectively, the “common control rules”) have applied for benefit plan purposes for many years but they have achieved new prominence under the ACA employer shared responsibility and ALE reporting rules. Determining whether or not common control exists requires identification and analysis of the relevant facts and application of the law to them, in the form of the above-cited Code sections, related Treasury Regulations, other agency guidance and federal case law.  The rules governing common control status are complex and can require a significant amount of factual digging, including when business ownership interests are held by family members or in trust, and where ownership interests must be traced through several layers of entity ownership.  Applicable large employers that share ownership with other business entities, particularly those with employees, and that have not already ascertained their common control status for ACA purposes, are encouraged to get this process started without further delay.

 

[1] Although aggregated group status is used to determine status as an ALE, and in order to allocate the budget of 30 excludible full-time employees, excise tax liability is determined separately for each ALE member within the group.

 

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Filed under Affordable Care Act, Applicable Large Employer Reporting, Benefit Plan Design, Common Control Issues, Employer Shared Responsibility, Health Care Reform, PPACA