Applying the ERISA Controlled Group and Affiliated Service Group Rules in the Health Care Industry

Companies interested in entering the healthcare-related industry should consider compliance with medical principles of corporate practice. In many states, corporate medical practice doctrines prohibit corporations from practicing medicine or employing physicians to provide specialized medical services. Some states prohibit the practice of medicine by corporations, but they make exceptions for professional corporations, and many states also make exceptions for the employment of doctors by certain organizations.

The Friendly PC model is a common construction designed to comply with state corporate medical principles. The Friendly PC model includes a Professional Services Corporation (PSC) who practices medicine in partnership with a Managed Services Organization (MSO). The Friendly PC model, when properly structured and operated, is designed to withstand allegations that management companies or their owners have violated corporate medical practice prohibitions. For more information, please refer to the following articles:

The friendly PC model may be the solution to corporate healthcare practices, but it can have unintended consequences for employee benefits plans sponsored by PSCs and MSOs.

ERISA administrative group and related service group rules

Employee benefit plans are subject to complex regulations under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (Code). The Administrative Groups and Related Services Groups Regulations specify whether, for the purposes of ERISA and the Code, two or more companies and other specified groups of related trades or businesses are treated as one employer. increase.

When two or more employers are considered one employer, various rules under ERISA and the Code apply on a controlled group basis. Control group rules generally allow employers to subdivide their employee populations into separate organizations (one that employs highly paid employees and the other that does not hire highly paid employees) to ensure that It prevents us from providing generous benefits.

Controlled group rules

Administrative group rules treat the following groups as one legal employer:

• parent-child group. A parent-subsidiary group consisting of a parent company and at least 80% owned direct and indirect subsidiaries.
• sibling group. A sibling group is one in which the same 5 or fewer individuals, property, or trust owns at least 80% control of one or more transactions or businesses, and the same 5 or fewer individuals, property, or trust (together) At least 50% of each entity.
• A combination of parent-child groups and sibling groups. Parent-child groups and sibling groups can be combined if the parent company is a common member and meets the applicable requirements for both the parent-child test and the sibling test.

Applying these rules is more complicated than you might think.

Certain types of ownership are excluded for the purposes of administrative group rules. For example, non-voting stocks with limited and preferred dividends are excluded. In addition, certain employee stock awards may be excluded from the purposes of determining corporate ownership.

The rules also include an attribution rule that treats a particular person as owning an interest in an entity that he or she does not actually own. For example, an individual may be treated as owning shares owned by someone in their family. For more information, please refer to the following articles:

In the context of the friendly PC model, PSCs and MSOs typically do not belong to the same managed enterprise group. Friendly PC models typically do not include parent-subsidiary relationships (i.e. parent companies owning at least 80% of their subsidiaries) or sibling groups (i.e. groups generally having no more than 5 individuals, property or trusts). not. control multiple entities).

Associated service group rules

Associated Service Groups (ASGs) are similar to administrative groups, but analyzing whether an ASG exists involves more than an ownership structure of two or more entities. As a result, they often exist within the context of the friendly PC model.

Determining whether an ASG exists requires a detailed analysis of the relationships between service organizations to determine whether the test is met. An ASG consists of a designated first service organization (FSO) and another service organization. The proposed regulation will refer to these as A organizations (A-Org) or B organizations (B-Org). If an administrative group exists, an ASG also exists.

• first service organization. An FSO must be a legal entity, partnership, or other organization primarily engaged in the performance of services such as medical, consulting, and legal services.

• Organization A. An A-Org is a service organization that is a partner or shareholder of an FSO (regardless of the percentage of interest it owns in the FSO) that either:
  • Periodically run services for FSO.again
  • regularly engages with the FSO to perform services for third parties.

  example: Dr. Smith incorporates his medical practice as a professional corporation, which is a medical practice partner with several other physicians who regularly provide services to third parties. Dr. Smith’s corporate medical practice is his A-Org and medical affiliation is his FSO.

• Organization B. An organization that meets the following three tests is a B-Org.

1. A large part of the B organization’s business consists of performing services for the FSO or the FSO’s A organization.
2. The services provided by an organization are the types that have historically been performed by employees in the FSO’s or A-Org’s service areas.and
3. At least 10% of the interests in the B organization are held by individuals who are FSO or highly paid employees of the A organization.

• management group. Administrative groups exist when:

1. Organizations perform administrative functions.and
2. The main task of the managing organization is to regularly and continuously perform administrative functions for the receiving organization.

As mentioned above, friendly PC models often create ASGs. As with the governing group rules, employers within the same ASG are treated as a single employer under the Code, while members of the ASG are treated as a single employer. no ERISA treats you as a single employer. The inconsistent treatment of ASG under the Code and ERISA has the following bizarre consequences for ASG-sponsored medical plans:

• Multiple Employer Benefits Agreement (MEWA). If an ASG member sponsors a group health plan for all employers in the group, that plan will be MEWA under her ERISA unless the ASG also satisfies a code-based supervised group examination. MEWA is group health insurance sponsored by employers who do not meet the required joint ownership percentage for managed groups (i.e. parent-child groups or sibling groups). MEWA is subject to state law and state enforcement, increasing the administrative burden. Additionally, his MEWA, with less than 25% of his common control, must file Form M-1 with the federal government, even if the plan manager is unaware that the plan is his MEWA. Failure to do so will result in him being fined over $1,500 per day.
• Affordable Care Act (ACA). Notwithstanding the foregoing, ASG will be treated as a single employer for purposes of determining whether an entity is an Applicable Large Employer subject to the Employer Order and Reporting Rules of his ACA. This is because that decision is based on code conventions rather than his ERISA.

Finally, the Friendly PC model requires special consideration before granting stock awards to employees or independent contractors. Incentive stock options with tax benefits may only be granted to employees of the employing company or affiliated company (parent company or subsidiary based on 50% co-ownership interest). In addition, the deferred compensation rules under Code Section 409A contain exceptions for certain share rights. However, this exception applies only if the stock-based award confers an interest in the entity that the individual provides services to or has a controlling interest in that entity. Without this exception, most stock-based benefits would be subject to Code Section 409A and would fail to comply with its complex rules.

Before establishing a friendly PC model, organizations should analyze how the friendly PC model impacts employee benefits plans. The friendly PC model may be the solution to corporate healthcare practices, but it can pose complex problems for employee benefits planning. Her qualified ERISA attorney familiar with these rules should be consulted when designing a Friendly PC model to ensure compliance and avoid common pitfalls.