Employer beware: affiliated service group is a single employer for benefit and health care coverage testing.

• Author: Michael, Daniel P.

Secs. 414(b) and 414(c) require that all employees of commonly controlled corporations or trades or businesses be treated as employees of a single corporation or trade or business. But by arranging the ownership of related business entities in an artificial manner, the rules established by these sections can be avoided. In Kiddie, 69 T.C. 1055 (1978), and Garland, 73 T.C. 5 (1979), the Tax Court held that where a controlled group situation did not exist, it would not be necessary to aggregate employees for purposes of testing for coverage and discrimination. Congress subsequently enacted Sec. 414(m) to prevent this circumvention by expanding the idea of control to separate but affiliated entities. These are known as the affiliated service group rules.

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While these rules are fairly long-established, most practitioners are not fully literate in how they apply to various situations. With the passage of the Patient Protection and Affordable Care Act (PPACA), PL. 111-148, the rules now apply far beyond their original purpose. PPACA mandates that certain employers (i.e., applicable large employers, or ALEs) offer health coverage to their full-time employees. The definition of an ALE generally hinges on the number of full-time equivalent employees (FTEs). And although employers may be temporarily relieved from this mandate due to one or more transition rules, it is still important to be aware of the employer aggregation rules for counting FTEs. Furthermore, while there seems to be at least some general awareness regarding Sec. 414's commonly controlled corporations or trades or businesses rules, the affiliated service group rules frequently can go unnoticed in employee benefit testing. Consequently, it is a critical time to revisit and understand the rules regarding affiliated service groups.

Sec. 414(m) provides in relevant part that, for purposes of most employee benefit requirements, all employees of the members of an affiliated service group shall be treated as employed by a single employer. An affiliated service group is a group consisting of a first service organization (FSO) and:

1. One or more A organizations (as defined in Prop. Regs. Sec. 1.414(m)-2(b));

2. One or more B organizations (as defined in Prop. Regs. Sec. 1.414(m)-2(c)); or

3. One or more A organizations and one or more B organizations.

   An affiliated service group can also include a group consisting of an organization the principal business of which is...