diff --git a/lib/ansible/runner/action_plugins/group_by.py b/lib/ansible/runner/action_plugins/group_by.py
index 110f0eafe6..63e72711aa 100644
--- a/lib/ansible/runner/action_plugins/group_by.py
+++ b/lib/ansible/runner/action_plugins/group_by.py
@@ -38,6 +38,8 @@ class ActionModule(object):
         # the group_by module does not need to pay attention to check mode.
         # it always runs.
 
+        # module_args and complex_args have already been templated for the first host.
+        # Use them here only to check that a key argument is provided.
         args = {}
         if complex_args:
             args.update(complex_args)
@@ -68,7 +70,16 @@ class ActionModule(object):
                     break
             if next_host:
                 continue
-            group_name = template.template(self.runner.basedir, args['key'], data)
+
+            # Template original module_args and complex_args from runner for each host.
+            host_module_args = template.template(self.runner.basedir, self.runner.module_args, data)
+            host_complex_args = template.template(self.runner.basedir, self.runner.complex_args, data)
+            host_args  = {}
+            if host_complex_args:
+                host_args.update(host_complex_args)
+            host_args.update(parse_kv(host_module_args))
+
+            group_name = host_args['key']
             group_name = group_name.replace(' ','-')
             if group_name not in groups:
                 groups[group_name] = []
diff --git a/test/integration/Makefile b/test/integration/Makefile
index d53201d18b..19e087e75b 100644
--- a/test/integration/Makefile
+++ b/test/integration/Makefile
@@ -14,7 +14,7 @@ else
 CREDENTIALS_ARG =
 endif
 
-all: non_destructive destructive check_mode test_hash test_handlers
+all: non_destructive destructive check_mode test_hash test_handlers test_group_by
 
 non_destructive:
 	ansible-playbook non_destructive.yml -i $(INVENTORY) -e @$(VARS_FILE) $(CREDENTIALS_ARG) -v $(TEST_FLAGS)
@@ -25,6 +25,9 @@ destructive:
 check_mode:
 	ansible-playbook check_mode.yml -i $(INVENTORY) -e @$(VARS_FILE) $(CREDENTIALS_ARG) -v --check $(TEST_FLAGS)
 
+test_group_by:
+	ansible-playbook test_group_by.yml -i inventory.group_by -e @$(VARS_FILE) $(CREDENTIALS_ARG) -v $(TEST_FLAGS)
+
 test_handlers:
 	ansible-playbook test_handlers.yml -i inventory.handlers -e @$(VARS_FILE) $(CREDENTIALS_ARG) -v $(TEST_FLAGS)
 
diff --git a/test/integration/inventory.group_by b/test/integration/inventory.group_by
new file mode 100644
index 0000000000..d8d285dee5
--- /dev/null
+++ b/test/integration/inventory.group_by
@@ -0,0 +1,6 @@
+[lamini]
+alpaca genus=vicugna
+llama genus=lama
+
+[lamini:vars]
+ansible_connection=local
diff --git a/test/integration/test_group_by.yml b/test/integration/test_group_by.yml
new file mode 100644
index 0000000000..6385c1f5ad
--- /dev/null
+++ b/test/integration/test_group_by.yml
@@ -0,0 +1,111 @@
+# test code for the group_by module
+# (c) 2014, Chris Church <cchurch@ansible.com>
+
+# This file is part of Ansible
+#
+# Ansible is free software: you can redistribute it and/or modify
+# it under the terms of the GNU General Public License as published by
+# the Free Software Foundation, either version 3 of the License, or
+# (at your option) any later version.
+#
+# Ansible is distributed in the hope that it will be useful,
+# but WITHOUT ANY WARRANTY; without even the implied warranty of
+# MERCHANTABILITY or FITNESS FOR A PARTICULAR PURPOSE.  See the
+# GNU General Public License for more details.
+#
+# You should have received a copy of the GNU General Public License
+# along with Ansible.  If not, see <http://www.gnu.org/licenses/>.
+
+- hosts: lamini
+  gather_facts: false
+  tasks:
+    - name: group by genus
+      group_by: key={{ genus }}
+    - name: group by first three letters of genus with key in quotes
+      group_by: key="{{ genus | truncate(3, true, '') }}"
+    - name: group by first two letters of genus with key not in quotes
+      group_by: key={{ genus | truncate(2, true, '') }}
+    - name: group by genus in uppercase using complex args
+      group_by: { key: "{{ genus | upper() }}" }
+
+- hosts: vicugna
+  gather_facts: false
+  tasks:
+    - name: verify that only the alpaca is in this group
+      assert: { that: "inventory_hostname == 'alpaca'" }
+    - name: set a fact to check that we ran this play
+      set_fact: genus_vicugna=true
+
+- hosts: lama
+  gather_facts: false
+  tasks:
+    - name: verify that only the llama is in this group
+      assert: { that: "inventory_hostname == 'llama'" }
+    - name: set a fact to check that we ran this play
+      set_fact: genus_lama=true
+
+- hosts: vic
+  gather_facts: false
+  tasks:
+    - name: verify that only the alpaca is in this group
+      assert: { that: "inventory_hostname == 'alpaca'" }
+    - name: set a fact to check that we ran this play
+      set_fact: genus_vic=true
+
+- hosts: lam
+  gather_facts: false
+  tasks:
+    - name: verify that only the llama is in this group
+      assert: { that: "inventory_hostname == 'llama'" }
+    - name: set a fact to check that we ran this play
+      set_fact: genus_lam=true
+
+- hosts: vi
+  gather_facts: false
+  tasks:
+    - name: verify that only the alpaca is in this group
+      assert: { that: "inventory_hostname == 'alpaca'" }
+    - name: set a fact to check that we ran this play
+      set_fact: genus_vi=true
+
+- hosts: la
+  gather_facts: false
+  tasks:
+    - name: verify that only the llama is in this group
+      assert: { that: "inventory_hostname == 'llama'" }
+    - name: set a fact to check that we ran this play
+      set_fact: genus_la=true
+
+- hosts: VICUGNA
+  gather_facts: false
+  tasks:
+    - name: verify that only the alpaca is in this group
+      assert: { that: "inventory_hostname == 'alpaca'" }
+    - name: set a fact to check that we ran this play
+      set_fact: genus_VICUGNA=true
+
+- hosts: LAMA
+  gather_facts: false
+  tasks:
+    - name: verify that only the llama is in this group
+      assert: { that: "inventory_hostname == 'llama'" }
+    - name: set a fact to check that we ran this play
+      set_fact: genus_LAMA=true
+
+- hosts: '{{genus'
+  gather_facts: false
+  tasks:
+    - name: no hosts should match this group
+      fail: msg="should never get here"
+
+- hosts: alpaca
+  gather_facts: false
+  tasks:
+    - name: check that alpaca matched all four groups
+      assert: { that: ["genus_vicugna", "genus_vic", "genus_vi", "genus_VICUGNA"] }
+
+- hosts: llama
+  gather_facts: false
+  tasks:
+    - name: check that llama matched all four groups
+      assert: { that: ["genus_lama", "genus_lam", "genus_la", "genus_LAMA"] }