Definition of Controlled Group
Rev. Proc. 2016-33, section 1.01(2)
(2) The term “controlled group” means any controlled group of corporations or trades or businesses under common control within the meaning of sections 414(b) and (c) of the Code, and the regulations thereunder.
Rev. Proc. 2016-33, section 2.02
.02 Controlled groups. If more than one member of a controlled group seeks to be certified as a CPEO, each such member must submit a separate application. Members of a controlled group may not apply jointly on one application. See sections 2.04, 2.05(6), and 2.06(5) for details regarding the documentation relating to the bond and financial review requirements that CPEO applicants that are members of a controlled group must submit.
Rev. Proc. 2016-33, section 2.04
.04 Proof of bond.
(1) Surety letter. With its application, a CPEO applicant must submit a signed letter from a qualified surety confirming that the surety agrees to issue a bond to the CPEO applicant if and when it is certified as a CPEO (a “surety letter”). The surety letter must also state that the surety agrees to issue a bond in the amount required by § 301.7705-2T(g)(2) and pursuant to the terms set forth in Form 14751, Certified Professional Employer Organization Surety Bond. If a CPEO applicant is a member of a controlled group of which other members are CPEO applicants or CPEOs, the surety letter must also contain the name and EIN of each CPEO applicant and each CPEO that is or will be covered by the bond. All CPEO members of a controlled group are required to be on the same bond in the amount required by § 301.7705-2T(g)(2), applied as if all such CPEO members (and/or any of their precursor entities, if applicable) were one organization.
(2) Form 14751. If the IRS approves a CPEO applicant’s application for certification, the CPEO applicant has 30 days from the date the IRS provides notice of certification (see section 6) to submit a properly completed and executed Form 14751 (or, in the case of a CPEO applicant that is a member of a controlled group with existing CPEOs, to post a superseding bond using a properly completed and executed Form 14751, as described in section 6.02) providing for a bond in the amount required by § 301.7705-2T(g)(2) and signed by both a qualified surety and the CPEO (or CPEOs in the case of a bond covering a controlled group).
Rev. Proc. 2016-33, section 2.05(6)
(6) Financial statements for controlled groups. In satisfaction of the requirement in paragraph (1), if a CPEO applicant is a member of a controlled group of which other members are CPEO applicants or CPEOs, the CPEO applicant must submit copies of combined or consolidated annual audited financial statements for all CPEO applicants and CPEOs in the controlled group, with an accompanying unmodified opinion of a CPA that such financial statements are presented fairly and in accordance with GAAP. The combined or consolidated annual audited financial statements may, but are not required to, also include all members of the controlled group that are not CPEO applicants or CPEOs. The statements and opinion must contain the name and EIN of each CPEO applicant and CPEO in the controlled group. If the statements and opinion include members of the controlled group that are not CPEOs or CPEO applicants, the name and EIN of these members must also be included. Although the CPEO applicant is not required to provide a copy of its separate financial statements as part of its application, if the financial position of a CPEO applicant is unclear from the combined or consolidated financial statements of the controlled group of which the CPEO applicant is a member, the IRS may request additional financial information that is needed to evaluate the CPEO applicant’s position, such as the annual balance sheet, income statement, and statement of cash flow, of the individual CPEO applicant. Notwithstanding the foregoing, and as required by section 2.05(2), a CPEO applicant that is a member of a controlled group of which other members are CPEO applicants or CPEOs must provide an opinion of a CPA that the individual CPEO applicant’s financial statements reflect positive working capital (as defined by GAAP) or, if the requirements of section 2.05(4) are met, reflect negative working capital, with the opinion in either case setting forth in detail a calculation of the individual CPEO applicant’s working capital. For purposes of the requirements of section 2.05(4), if it is unclear whether the CPEO applicant has positive or negative working capital for the last quarter of the fiscal year based on the combined or consolidated financial statements of the controlled group of which the CPEO applicant is a member, the IRS may request additional financial information on an individual CPEO applicant basis. The status of other CPEO applicants and CPEOs in the controlled group is not affected if the CPEO applicant is denied certification because the annual audited financial statements reflect that the CPEO applicant has negative working capital and the CPEO applicant fails to meet the exception described in section 2.05(4).
Rev. Proc. 2016-33, section 2.06(5)
(5) In satisfaction of the requirement in this section 2.06, if a CPEO applicant is a member of a controlled group of which other members are CPEO applicants or CPEOs, the CPEO applicant must submit the quarterly assertions and attestations described in this Section 2.06 for all CPEO applicants and CPEOs in the controlled group on a controlled group basis, rather than for the CPEO applicant individually. The quarterly assertions and attestations must contain the name and EIN of each CPEO and CPEO applicant in the controlled group. However, the quarterly working capital statement described in section 2.06(3) must relate to the CPEO applicant alone and must not be prepared on a combined or consolidated basis with other members of the controlled group. For purposes of the requirements of Section 2.06(3), if it is unclear whether the CPEO applicant has positive or negative working capital for the last quarter of the fiscal year based on the combined or consolidated financial statements of the controlled group of which the CPEO applicant is a member, the IRS may request additional financial information about the individual CPEO applicant. The status of other CPEO applicants and CPEOs in the controlled group is not affected if the CPEO applicant is denied certification because the quarterly working capital statement described in section 2.06(3) reflects negative working capital and the CPEO applicant fails to meet the exception described in section 2.06(3).
Preamble to Final and Temporary Regulations, section 4
b. Related Entity
The temporary regulations define a related entity of a CPEO applicant or CPEO as including any person that is a member of a controlled group (within the meaning of sections 414(b) and (c) and the regulations thereunder, with two adjustments) of which the CPEO is also a member. Section 414(b) incorporates by reference the controlled group definitions in section 1563. Likewise, the regulations prescribed under section 414(c)—§§ 1.414(c)-2 and 1.414(c)-3—rely on principles that are substantially similar to the controlled group definitions in section 1563. However, with respect to persons that are not providers of employment-related services, the temporary regulations substitute ‘‘more than 50 percent’’ for ‘‘at least 80 percent’’ in each place the term appears in section 1563(a) and § 1.414(c)-2. For persons that are providers of employment-related services, the temporary regulations substitute ‘‘more than 5 percent’’ for ‘‘at least 80 percent’’ in each place the term appears in section 1563(a) and § 1.414(c)-2. The temporary regulations define a provider of employment-related services as a person that provides payroll or other employment tax administration and compliance services to clients, including, but not limited to, collecting, reporting, and paying employment taxes with respect to wages or compensation paid by the provider of employment-related services to individuals performing services for the clients. A provider of employment- related services includes, but is not limited to, a PEO and a CPEO.
A related entity of a CPEO applicant or CPEO also includes any provider of employment-related services if a majority of the directors or a majority of the officers of the CPEO applicant or CPEO are also directors or officers, respectively, of the provider of employment-related services. Finally, a related entity includes any provider of employment-related services with an owner who is a responsible individual of both the provider of employment- related services and the CPEO applicant or CPEO by virtue of the individual’s ownership percentage.