Control Group FAQs
What is a control group?
Businesses that share common ownership. Depending on the percentage of ownership, companies under a controlled group (common control) must be treated as one company for retirement plan purposes.
How is ownership determined?
Family attribution rules apply, so stock owned by a spouse, parent or child is often deemed to be owned by one person. In addition, state law typically determines the actual ownership of stock and ownership can be based on voting power or on stock value.
What are the types of controlled groups?
Parent-subsidiary, where the parent organization owns at least 80 percent of the subsidiary organization. For purposes of the annual addition limit, the 80 percent requirement is reduced to an amount more than 50 percent.
Brother-sister, where (1) the same five or fewer persons own an aggregate of at least 80 percent of each business and (2) The individuals in no. 1, must own more than 50 percent of each business. For this purpose, only identical ownership is considered. For instance, if Individual A owns 30 percent of ABC Company and 25 percent of XYZ Company, only 25 percent is counted for this requirement.
Combined, where a combination of parent-subsidiary control group and brother-sister control group exists.
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))
Why do we care about control groups and what are the consequences?
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.
How do I know whether or not I am a part of a control group?
If you have over 80% ownership in this structure, and own over 80% in another entity you have a control group.
What are the consequences of failing to comply with control group regulations?
When the plan is not offered to employees of a control group, we’re concerned about the “rights, benefits, and features” of the plan. Failure to offer the plan to eligible employees is a plan operational error and could lead to plan disqualification. The fix for not including employees when they should be included is the employer must make qualified non-elective contributions based on the average HCE contribution. Another consequence in not including the employees who should have been included, is that they are not accounted for in testing. As a result, a plan could be discriminating and not aware it needs to be corrected – which again will lead to plan disqualification.
What do I need to know if I am administering a 401(k) Plan that is a part of a controlled group?
The employer must make sure to educate the employees of all control groups, making them aware they can participate in this retirement plan. Please refer to your 401(k) Plan documents for the necessary paperwork to give to employees.
