Under the controlled group rules, two or more business entities with common ownership are to be treated as a single employer for qualified retirement plan purposes.  A company sponsoring a retirement plan may need to provide those same benefits for employees of separate companies that it owns.  If nothing else, those employees at least need to be taken into consideration for compliance testing even if they don't benefit under the plan.

These rules can cause confusion for plan sponsors.  “I want to provide benefits for ABC Company.  XYZ Company is completely separate.  Why can’t I disregard XYZ?” they may ask.  It is because there is the potential for abuse.  Without the controlled group rules, what is to stop someone from having ABC Company employ all the key executives and giving them retirement benefits while having XYZ Company employ everyone else and giving them no benefits? 

Parent-subsidiary groups 

There are two types of controlled groups.  The first is the “parent-subsidiary” group.  This occurs when there is a group of corporations connected through at least 80% ownership.  A simple example is if ABC owns at least 80% of XYZ, then the two companies comprise a controlled group. 

If ABC owns 80% of XYZ, and XYZ owns 80% of JKL, then all three are a controlled group because at least 80% of each company is owned by another member of the group.  There would also be a controlled group if JKL were owned 50% by ABC and 30% by XYZ. 

There are more complex examples involving multiple companies, different classes of common stock, and options. 

Technically, only corporations can be members of a controlled group.  There are “common control” rules that apply to partnerships, LLCs, sole proprietors, and other entities.  Common control rules are similar to controlled group rules.  For simplicity, we will use the term controlled group when referring both to controlled groups and common control groups. 

Brother-sister groups 

The other type of controlled group is the “brother-sister” group.  Two conditions must apply for there to be a brother-sister group: 

1. Five or fewer people must own 80% or more of each entity.
2. The same five or fewer people together must own more than 50% of each entity, taking into account the ownership of each person to the extent such ownership is identical with respect to each organization. 

Consider the following example: 

ABC and XYZ are a controlled group.  Abel, Baker, Charlie, Daniel, and Edward own 82% and 100% of ABC and XYZ, respectively, so the 80% test is met.  The identical ownership of these five people, meaning the sum of the lowest percentages each own in either company, is 52%.  Thus, the 50% test is met. 

Now suppose Charlie sells 10% of XYZ Company to Frank.  The table looks like the following: 

Abel, Baker, Charlie, Daniel, and Edward continue to own at least 80% of both businesses.  However, their combined identical ownership is only 42%.  No other combination of five owners either owns at least 80% of both businesses or has combined identical ownership greater than 50%.  Therefore, ABC and XYZ are not a controlled group in the second example. 

Controlled Group Rules Are Complicated 

Finally, note that there are family attribution rules under which certain family members are deemed to own the business interests of other family members.  Also, two or more businesses that are not a controlled group may be an affiliated service group if they have a relationship in doing business.  Affiliated service groups are treated the same as controlled groups in the qualified retirement plan world.  Affiliated service groups are beyond the scope of this article. 

This article is intended to give you a brief overview of the controlled group rules.  A determination about controlled group status should not be made without the help of a competent professional familiar with these rules.  If we can help you with such a determination, please let us know.