Case Study: Affiliated Service Groups with Mike Bourne and Rachel Rosner
When it comes to retirement plan compliance, ownership structures and related business relationships matter more than many business owners realize. A recent client case highlights why asking the right questions, and digging beyond the surface, can make all the difference.
A Real-World Example
When Mirador sat down with a prospective client, the structure looked fairly straightforward. The company had created a separate management and marketing entity where only the CEO, the COO (also the CEO’s spouse), and one additional employee were employed. Meanwhile, the main operating company employed about 50 staff. The defined benefit plan, however, was set up only for the smaller management company.
At first glance, this raised important questions:
- Were these two companies truly independent?
- Did ownership overlap in a way that created a controlled group?
- Or was this an affiliated service group situation, where one company exists primarily to provide services to the other?
“The IRS assumes that if ownership is in the family, you have control. The only exception is between siblings.” – Mike Bourne
Attribution Rules and Controlled Groups
In the initial conversation, ownership was described as partly held by a “private investor.” Upon closer review, that investor turned out to be the business owner’s mother. This revelation mattered because of IRS attribution rules.
Under these rules, ownership is attributed among family members, spouses, parents, children, and grandchildren all count. The effect? Even if ownership is divided on paper, the IRS treats the entities as a single controlled group. The only family relationships excluded from attribution are siblings.
“Through attribution, family ownership is combined. Parents, spouses, children, and even grandchildren all count toward determining a controlled group.” – Mike Bourne
This meant the companies were not separate for retirement plan purposes. They had to be considered together.
Affiliated Service Groups: Closing Loopholes
The case also touched on another important concept: affiliated service groups (ASGs). These rules exist to prevent owners from carving out certain employees, such as administrators, nurses, or staff, into a separate company solely to exclude them from pension benefits.
Classic examples include physician practices that attempted to create separate service entities for non-physician staff, leaving only the doctors in the retirement plan. The IRS closed this loophole by defining ASGs: if one company provides essential services to another, and ownership ties exist, the employees must be treated as part of the same group for retirement plan purposes.
Why This Matters for Business Owners
For high-earning business owners, the stakes are clear:
- Compliance – Failing to recognize a control group or affiliated service group can invalidate plan design and expose the business to penalties.
- Fairness – The IRS requires that plans don’t disproportionately benefit owners at the expense of employees.
- Strategy – With the right plan design, owners can still maximize contributions and tax savings while meeting compliance requirements.
“Affiliated service group rules exist to keep owners from excluding employees while still taking full advantage of retirement plan tax deductions.” – Rachel Rosner
Understanding how ownership and service relationships affect retirement plans is crucial. Without a comprehensive view, even well-intentioned plan designs can fall short, or worse, put businesses at risk.
Getting it Right the First Time
At Mirador, we’ve seen how complex these rules can be, and we know that getting them right is essential. Control groups and affiliated service groups aren’t just technical definitions, they directly shape how retirement plans must be structured, tested, and administered.
The right guidance ensures owners can capture the tax advantages of defined benefit or cash balance plans while keeping their plans compliant and their employees protected.
Ready to see how the right plan design can help you save on taxes, maximize retirement savings, and support your team? Reach out to our team to start the conversation.
