An affiliated service group, in the context of employee benefits and taxation, is a type of relationship between two or more businesses that are connected based on their provision of certain services to each other. It is a concept primarily relevant in the United States for determining eligibility and compliance requirements related to employee benefit plans, including retirement plans. An affiliated service group is defined under the Internal Revenue Code (IRC) Section 414(m).

Here are some key points to understand about affiliated service groups:

1. Definition: An affiliated service group generally consists of two or more businesses that are related in terms of service provision. It involves a principal entity (referred to as the “service organization”) and one or more businesses (referred to as the “service recipients”) that receive services from the principal entity or provide services to the principal entity. The services provided or received are typically significant and integral to the operations of the businesses involved.

2. Common Ownership or Control: To be considered an affiliated service group, there must be common ownership or control among the businesses involved. This means that there is a certain level of shared ownership or control between the service organization and the service recipients. For example, one or more individuals or entities may directly or indirectly own a significant percentage (usually 80% or more) of the voting stock or ownership interest in both the service organization and the service recipients.

3. Employee Benefits Implications: Affiliated service groups have implications for employee benefits, particularly retirement plans. When businesses are part of an affiliated service group, the employees of those businesses are considered collectively for determining eligibility and compliance requirements of employee benefit plans. This ensures that employees working for different businesses within the affiliated service group are treated consistently in terms of benefits and compliance.

4. Controlled Group Rules: Affiliated service groups are closely related to the concept of controlled groups. In fact, an affiliated service group can be a type of controlled group. However, the key distinction is that an affiliated service group is based on the provision of services, whereas a controlled group is primarily based on ownership or control relationships between businesses.

5. Compliance and Regulations: Affiliated service groups are subject to various compliance requirements and regulations, particularly in the area of employee benefits. For example, retirement plans maintained by businesses within an affiliated service group must satisfy certain nondiscrimination testing requirements to ensure that the benefits provided do not disproportionately favor highly compensated employees.

Understanding the rules and requirements related to affiliated service groups is important for businesses that engage in service relationships with other entities. Consulting with legal and tax professionals can provide guidance on the specific implications of being part of an affiliated service group and ensure compliance with applicable regulations.