Affiliated Service Group -
Affiliated Service Group
Categories:Defined Benefit Plan Issues   Defined Contribution Plan Issues   Glossary   Qualified Retirement Plan Issues  
Updated: 17/Jun/06 14:51:26 by Joe Friberg
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Affiliated Service Group

A group of businesses with some common ownership that work together in performing services for clients may be an Affiliated Service Group and thus have to be treated as a single entity for purposes such as nondiscrimination testing, maximum benefit limits, and detectability of contributions.

Any group of business, whether Sole-Proprietorships, Partnerships, or Corporations, if it is determined to be an Affiliated Service Group, has to be treated as a single business entity for the purpose of applying many aspects of pension law. The determination of Affiliated Service Group status is based both on ownership percentages and the nature of the business relationship between the entities.

The identification of an Affiliated Service Group starts with a First Service Organization (FSO). The FSO is affiliated with one or more of the following:

  • A-ORG: a service organization that:
    • ownership: is a shareholder or partner in the FSO
    • services: regularly performs services for the FSO or is regularly associated with the FSO in performing services for third parties
      ASG A-ORG diagram
  • B-ORG: a service organization where:
    • ownership: ≥ 10% of interest in B-ORG is owned by Highly Compensated Employees (HCEs) of the FSO or of an A-ORG
    • services: a significant portion of its business is for the FSO or an A-ORG of a type that historically, in the field of service, was performed by employees
      ASG B-ORG diagram
  • Notes:

Example 1

Three doctors maintain their 3 separate corporations A, B, and C, and these 3 corporations are equal-partners in a medical practice P. The 3 corporations each have only one employee, the respective doctor/owner. The partnership P maintains the support staff, provides medical services to patients, and pays the corporations for the respective doctors' services.

In this arrangement, the medical practice P is an FSO, and each of the corporations A, B, and C are A-ORGs. Altogether, corporations A, B, C, and the partnership P form an Affiliated Service Group, so all qualification requirements and nondiscrimination tests run on any Qualified Plan of any of the 4 employers must be applied as if there were a single employer.

The result would be the same given any number of doctors (and corporate partners), because there is no minimum threshold on ownership/partnership interest in the FSO by the A-ORG.

Note that this arrangement is not a Controlled Group because ownership in the partnership P is diffuse (33-1/3%) while ownership in the corporations is highly concentrated (100%). Apart from these Affiliated Service Group rules, this type of arrangement could clearly be used to set up retirement plans for the doctors only--without covering the employees. Hence, this type of arrangement was the instigating factor for this section of the code.


Attorney Anderson establishes her practice as Anderson P.C. The corporation is in turn a partner in a larger law firm. Anderson and her P.C. are regularly associated with the firm in performing legal services for third parties. Anderson P.C. is to be considered an A-ORG, the firm is an FSO, and together they form an Affiliated Service Group.

Example 3

Insurance agent Baker runs his own insurance agency and also owns a 15% interest in an employee benefits consulting firm. About 20% of the consulting firm's revenues are generated by designing and maintaining employee benefits packages sold by the insurance agency. These services provided by the consulting firm to the insurance agency could potentially be provided by employees of the agency, and are of a type that historically has been performed by employees of insurance agencies. Baker is an employee of the insurance agency (but not the consulting firm).

In this arrangement, the insurance agency is an FSO, and the consulting firm is a B-ORG since more than 10% of its ownership is held by Baker, an HCE of the FSO. The two organizations together form an Affiliated Service Group. Any plan adopted by one of the entities will need to be tested based on all employees of both businesses.

Note that not even a majority of the business of the consulting firm is directly related to the insurance agency and that the law does not set a numeric threshold but uses the subjective term significant. Proposed regs say 10% is significant; see article referenced below for further discussion.

Extended Examples

More Info

  • An ERISA Attorney may be helpful in evaluating the status of a potential Affiliated Service Group.
  • It is possible to request the IRS to make a determination based on detailed facts as to whether or not an Affiliated Service Group exists.
  • Follow the link to review the language of the code defining Affiliated Service Groups: IRC 414(m).

Another aggregation of employers that must be considered is Controlled Groups, which are defined objectively based on common ownership percentages.

Here are some case studies in articles from an attorney specializing in ownership and control questions.