How do we determine a tax-exempt employer's controlled group and why do we care?

Tip of the Day

By Stephanie Reagan

When a private tax-exempt employer is in a controlled group with other organizations, all of the organizations are treated as a single employer when applying certain employee benefit plan requirements under the U.S. Internal Revenue Code (“Code”). 

It is important to know whether a tax-exempt employer is in a controlled group in order to determine:

  • If the plans in the controlled group violate the retirement plan, cafeteria plan, dependent care plan and self-insured health plans' nondiscrimination rules since they must be tested together with regards to the Code Sections 401(a)(3), 410(a), 410(b), 401(a)(4), 125, 129 and 105(h);
  • The controlled group's employee numbers for the determination of whether an organization is a Large Employer under Code Section 4980H (Shared Responsibility for Employers Regarding Health Coverage);
  • The controlled group's Highly Compensated Employees ("HCEs") and Non-Highly Compensated Employees ("NHCEs") under Code Section 414(q) for retirement and health care discrimination testing purposes;
  • Whether the plan's vesting requirements are met under Code Sections 401(a)(7) and 411;
  • If the correct Code Section 401(a)(17) and 415 compensation and contribution limits and Code Section 402(g) contribution dollar limits for a participant have been met or exceeded when the participant is employed under more than one organization in the controlled group because the limits for compensation and contributions must be combined for all of the members of the controlled group;
  • If the plan's top-heavy rules under Code Section 416 have been met, etc.

Control is determined based on the facts and circumstances for a tax-exempt organization. For this purpose, common control exists between a tax-exempt organization and another organization if at least 80 percent of the directors or trustees of one organization were either representatives of, or directly or indirectly controlled by, the other organization.

A trustee or director is treated as a representative of another exempt organization if he or she also is a trustee, director, agent, or employee of the other exempt organization. A trustee or director is controlled by another organization if the other organization has the general power to remove such trustee or director and designate a new trustee or director. Whether a person has the power to remove or designate a trustee or director is also based on facts and circumstances. [Treas. Reg. Section 1.414(c)-5(b), 72 Fed. Reg. 41,158 (July 26, 2007)]

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