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Mr. Nicholas W. Ferrigno, Jr.
Greenebaum Doll & McDonald PLLC
Post Office Box 2673
Covington, KY 41012-2673
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Dear Mr. Ferrigno:
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This is in response to your request regarding the application of section
3(40) of the Employee Retirement Income Security Act of 1974 (ERISA).
Specifically, you ask whether an “affiliated service group” within the
meaning of section 414(m) of the Internal Revenue Code (Code) is a “single
employer” for purposes of section 3(40) of ERISA.
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Section 3(40)(A) of ERISA provides, in pertinent part, that the term “multiple
employer welfare arrangement” (MEWA) “means an employee welfare benefit
plan, or any other arrangement (other than an employee welfare benefit plan),
which is established or maintained for the purpose of offering or providing any
[welfare] benefit described in [section 3(1) of ERISA] to the employees of two
or more employers (including one or more self-employed individuals), or to their
beneficiaries . . . .” If a plan is maintained by a single employer for the
exclusive purpose of providing benefits to that employer’s employees, former
employees, or their beneficiaries, the plan will be considered a single employer
plan and not a MEWA within the meaning of ERISA Section 3(40). Section 3(40)(B)(i)
provides that, for purposes of section 3(40), “two or more trades or
businesses, whether or not incorporated, shall be deemed a single employer if
such trades or businesses are within the same control group.”
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In determining whether trades or businesses are within the “same control
group,” section 3(40)(B)(ii) provides that the term “control group” means
a group of trades or businesses under “common control.” Pursuant to Section
3(40)(B)(iii), whether a trade or business is under “common control” with
another trade or business is to be determined under regulations issued by the
Secretary of Labor applying principles similar to those applied in determining
whether there is “common control” under section 4001(b) of Title IV of ERISA,
except that common control shall not be based on an interest of less than 25
percent.
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Trades or businesses with less than a 25 percent ownership interest thus are
not under “common control” for purposes of section 3(40) of ERISA, and,
therefore, are not a single employer for purposes of determining whether their
plan provides benefits to the employees of two or more employers under section
3(40). It is our understanding that “affiliated service group” status within
the meaning of section 414(m) of the Code may be based upon an interest of less
than 25 percent. Accordingly, “affiliated service group” status under
section 414(m) of the Code would not, in and of itself, support a conclusion
that a group of two or more trades or businesses would be a single employer for
purposes of section 3(40) of ERISA.
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With regard to situations where there is a 25 percent or more ownership
interest, it should be noted that the Department has not adopted regulations
under Section 3(40)(B)(iii). However, Section 4001(b) of Title IV, and
subsection (a) of 29 CFR § 4001.3, provide that the PBGC will determine that
trades or businesses (whether or not incorporated) are under common control if
they are “two or more trades or businesses under common control” as defined
in regulations prescribed under section 414(c) of the Code. It is our
understanding that regulations issued under section 414(c) of the Code provide
that “common control” generally means, (i) in the case of a
parent-subsidiary group, the entities are connected through at least an 80%
ownership interest, or (ii) in the case of a brother-sister group: (a) five or
fewer people own at least an 80% interest in each entity and, (b) the same five
or fewer people together own a greater than 50% interest in each entity taking
into account the ownership of each person only to the extent such ownership is
identical with respect to each organization. See 26 CFR §1.414(c)-2.
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If you have questions on section 414 of the Code, you should contact the
Internal Revenue Service as it has interpretive authority over that section and
the regulations issued thereunder.
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We hope this information is of assistance to you.
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Sincerely,
John J. Canary
Chief, Division of Coverage, Reporting and Disclosure
Office of Regulations and Interpretations
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