Affiliated Service Group Rules for Defined Benefit Plans

So you are thinking about setting up a defined benefit plan or cash balance plan. But maybe you have ownership in another entity, and you also perform services for that entity?

This can be a big problem. You not only need to pass the control group rules but also the affiliated service group rules.

These rules are in place so that companies don’t use multiple corporations, LLCs, or business entities to avoid non-discrimination rules for defined benefit plans.

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There are actually two types of Affiliated Service Groups (ASG) that you should be aware of:

  1. Ownership based
  2. Management based

Ownership based Affiliated Service Group Rules

The affiliated service group rules (IRC section 414(m)) are intended to exclude a company from establishing a retirement plan for
just a single company if there are two or more entities that are considered an “affiliated service group.” For retirement plan purposes, this would be considered a single employer.

An affiliated service group is an entity (whether incorporated or unincorporated) that is either a service or management-type group. It consists of a First Service Organization (“FSO”) plus an “A organization”, a “B organization” or, A and B organizations.

This can be a little complicated so try to stay with me. An ASG will consist of three potential related entities:

  • First Service Organization (FSO)
  • “A” Organization; and
  • “B” Organization. 

All of the above businesses must be “organizations.” This includes partnerships, sole proprietorships, corporations (S or C), LLC, or other types of entities). A business is deemed to automatically be a Service Organization if it engages in one of the following areas:

  • Health/medicine
  • Accounting
  • Actuarial science
  • Architecture
  • Performing arts
  • Law
  • Engineering
  • Insurance
  • Consulting

What is an A Organization?

An “A organization” is a partner or shareholder in the FSO and regularly provides services to the FSO, or is associated with the FSO in the performance of services to third parties. For the ownership test, it is sufficient for the “A organization” Controlled and Affiliated Service Group Rules for Retirement Plans to have any ownership regardless of how small the percentage. 

An A-Org will meet all of the following:

  • It is a service organization.
  • It has some ownership interest in the FSO.
  • It provides services for the FSO or is regularly associated with the FSO in providing services to third parties.


Dr. Jones is a radiologist and owns 100% of his medical corporation. His corporation is a 50% partner in Jones & Simon Center, a partnership. 

His corporation provides certain medical services to the partnership, which provides medical services to the general public. Both the partnership and his corporation are considered service organizations. The clinic is the FSO, and his corporation is regarded as the A-Org.

What is a B Organization?

A “B organization” is an organization that provides services to the FSO or to an “A organization”’. The services provided would be comparable to services the employees would normally perform. In addition, a minimum of 10% of “B organization” ownership must be owned by officers or the Highly Compensated Employees at the FSO or the “A organization”.

A B-Org meets all of the following criteria:

  • A significant amount of the business operations of the B-Org is the performance of services for the FSO and/or its A-Orgs.
  • A minimum of 10% of the B-Org is owned by one or more Highly Compensated Employees of the FSO and/or its A-Orgs.
  • The services provided are generally performed in the FSO’s field or by employees of the A-Org.


Sally and Jessica are attorneys. Each of them has their own legal corporations. The two corporations own 100% of S and J, LLC. Sally and Jessica’s corporations are A-Orgs, S, and J, LLC is an FSO, and the three organizations together are an ASG.

Management function groups

Management groups are also considered ASGs that involve a management company and its client.

  • The management company is the company that performs management-related tasks and functions for a client and/or organizations related to that client as its primary business.
  • The client is the organization for which the management firm performs the related services.


A construction company splits into two different companies. One company was set up to employ field-level employees, and the second company employs the management and administrative team. 

The management company performs management responsibilities for the field services company, and the field services company is the only client of the management company. As such, both companies represent an ASG.

What happens when you are an Affiliated Service Group for purposes of retirement plans?

Suppose two or more businesses are part of an Affiliated Service Group. In that case, the employees of all of the ASG companies are considered employed by a single employer for retirement plan purposes. This would include the following:

  • Non-discrimination rules 
  • ADP/ACP testing for 401(k) plans 
  • Vesting rules 
  • Compensation limits 
  • SEP and SIMPLE rules
  • Participation and coverage rules 
  • Limitations on contributions and benefits 
  • Top-heavy rules 

Final Thoughts

Unfortunately, companies cannot set up separate business entities to exclude employees from participating in a defined benefit plan or another qualified plan. 

These Affiliated Service Group rules and the Controlled Group rules are complex, but the results are clear. All employees of any related companies must be considered together for purposes of benefits and testing. Failure to do so will potentially have to retroactively make contributions for all employees who were excluded in prior years plus interest and penalties. 

Paul Sundin

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