Top Five: What CPAs Should Know About Controlled Groups.

• Author: Roberts, Christine P.
• Position: Practice management

accountants who advise business owners should be aware that controlled group or affiliate service group status can derail otherwise careful benefit plan designs and have other, unintended consequences under federal laws, including the Affordable Care Act. Using a group of family-owned businesses as an example, this overview briefly surveys controlled group and other common ownership rules accountants who primarily advise business owners should be aware of to avoid the potential benefit plan complications that controlled group rules can create.

1. Why Controlled Groups Matter to Business Owners

   Worthy Family Enterprises, Inc. (WFE) is a C corp that provides management and administrative services to Worthy Growers, LLC, an agricultural business, and Worthy Resorts, LLC, which operates several hotel and spa properties in Northern California.

   WFE has 15 employees; Worthy Growers has approximately 80 employees, half of whom are seasonal; and Worthy Resorts has 30 employees. WFE employees are eligible to participate in a standardized 401 (k) profit sharing plan after completing six consecutive months of service, and an insured group health plan after completing 60 days of employment. Worthy Growers and Worthy Resorts do not offer employees any benefit plans. Ownership of all three businesses is concentrated in the hands of three Worthy family members and one Worthy Family grantor trust.

   If the three Worthy family businesses comprise a controlled group, the IRS will treat WFE, Worthy Growers and Worthy Resorts as a single employer for purposes of retirement and health benefit plan compliance. As a standardized type of plan, the WFE 401 (k) plan contains language that automatically covers employees of all businesses within the controlled group, such that it's subject to potential disqualification for failure to include employees of Worthy Growers and Worthy Resorts. Even if the plan document was non-standardized, the WFE 401 (k) plan would have to take employees of the other businesses into account for minum coverage and nondiscrimination testing purposes, and likely would not pass minimum coverage and nondiscrimination testing on a controlled group basis.

   The WFE group health insurance plan could potentially fail nondiscrimination rules that the Affordable Care Act applies to insured group health plans, which, when implemented by the IRS, will apply on a controlled group basis. Further, employees of all three businesses must be combined to...