1. WHAT IS A CONTROLLED GROUP OF CORPORATIONS?

A controlled group is any two or more corporations connected through stock ownership in any of the following ways:

• Parent-subsidiary group
  • 80% of stock of each (subsidiary) corporation is owned by another member of the group
  • Parent corporation must own 80% of the stock of at least one of the other members of the group
  • Brother-sister group
    • The same five or fewer individuals own at least 80% of the stock of the corporations
    • “Individual” includes ownership by an estate or trust
    • “Ownership” includes having a controlling interest and effective control of the corporations
    • Combined group
      • Combination of a Parent-subsidiary, and a Brother-sister group
      • “Parent” company is also a sibling in the “Brother-sister” group

      2. HOW IS STOCK OWNERSHIP DETERMINED?

      • Family attribution rules apply, so stock owned by a spouse, parent or child is often deemed to be owned by one person
      • State law typically determines the actual ownership of stock

      

    • Ownership can be based on voting power or on stock value
      

    3. WHAT IF THERE ARE DIFFERENT CLASSES OF STOCK?

    • If there is more than one class of stock, each classification of stock must be considered to determine the voting power and stock value
    • Voting rights, dividend rights, liquidation preferences are all considerations in determining stock value
    • Stock can be excluded from consideration if it is Treasury or nonvoting preferred stock

    4. WHAT IF THE PARENT COMPANY IS A FOREIGN CORPORATION?

    • The controlled group rules for qualified retirement plans apply to all corporations doing business in the U.S., even if the foreign parent is not a component member of a controlled group (e.g., foreign corporation taxable under IRC §881)
    • Nonresident aliens who do not have U. S. source income may be excluded from coverage testing
    • All companies owned by the foreign parent must be considered in controlled group testing even if they are separate subsidiaries for corporate income tax purposes

    5. CAN THE COMPANIES IN A CONTROLLED GROUP BE TREATED AS SEPARATE COMPANIES?

    IRS does have a procedure through which a company can request to be treated as a Separate Line of Business. (see IRC §414(r)) Following are limitations for these requests:

    • Must have a valid business purposes
    • Must have at least 50 employees within each line of business
    • Restrictions on HCE ratios in each separate line of business
    • Must notify IRS to request their approval

    6. HOW IS QUALIFIED PLAN COMPLIANCE TESTING AFFECTED BY THE CONTROLLED GROUP RULES?

    The employees of all corporations that are members of a controlled group are deemed to be employed by a single employer. (see IRC §414(b)) The following qualified plan provisions are impacted by this rule:

    

    §401(a)(4) Nondiscrimination rules

    §401(k) Actual Deferral Percentage (ADP) test

    §401(m) Actual Contribution Percentage (ACP) test

    §404(a) Deduction rules

    §410(b) Coverage testing

    §411 Vesting requirements

    §415 Contribution limits

    §416 Top heavy rules

    7. DO ALL MEMBERS OF A CONTROLLED GROUP HAVE TO PARTICIPATE IN ONE PLAN?

    No. Members of a controlled group may each have a different plan. Similarly, two or more members of the controlled group may adopt a single plan. In either case, all employees of the controlled group must be taken into account for testing purposes (see previous question.)

    8. WHAT ARE THE CONSEQUENCES FOR FAILURE TO FOLLOW THE CONTROLLED GROUP RULES?

    The IRS and Department of Labor (DOL) both have compliance correction programs. Generally, a submission must be made under the appropriate corrections program, a fee is paid, and testing must be performed for the periods in question. Additional contributions, penalties, and interest may apply. Please discuss these filings and your correction options with your ERISA attorney.

    

    9. DO CONTROLLED GROUP RULES APPLY TO WELFARE BENEFIT PLANS TOO?

    Yes, similar rules apply to welfare benefit plans such as Cafeteria plans (§125), Health Savings Accounts, Archer MSAs, and self-insured medical reimbursement plans (§105(h)). Please discuss with your insurance advisor for additional information.

    Controlled Group Definition according to Cornell

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