Related Companies: Controlled Groups FAQs

Controlled Groups FAQ

It seems that businesses of all sizes are more frequently being structured using multiple companies and/or that business owners are acquiring interests in other companies. With the implementation of the Affordable Care Act, some companies actively restructured to stay below the 50-employee coverage threshold. Regardless of the reason, there are complex IRS rules that must be considered when it comes to both the retirement and health benefits being offered to employees.

During the mid-1980s, Congress created a series of complex rules that require all companies in a related group to be combined when determining whether employee benefit plans are providing adequate benefits to enough of the employee population. While this may sound onerous, with some careful planning, these rules can also be used to provide retirement benefits to multiple companies more cost effectively.

The introductory paragraphs mention related companies. What exactly does that mean?

Although there are many ways in which companies can be related to each other, in this context, we are referring to overlapping ownership between companies and situations in which two or more businesses have formal working or management relationships. There are two broad categories of related companies — controlled groups and affiliated service groups. (See Internal Revenue Code sections 414(b) and (c) for more information.)

The remainder of this FAQ will focus on controlled groups.

We have prepared a separate FAQ on affiliated service groups, available here

What do you mean by ownership?

Ownership in this context is more of a generic term that refers to not only shares in a corporation but also to membership in an LLC, partnership interest in a partnership or LLP, and composition of the Board of Directors in a not-for-profit organization.

Perhaps more important, there are instances in which the ownership held by one person or entity is attributed to another person or entity. One of the most common forms of attribution is among family members. While we will spare you the gory details here, we have prepared a separate FAQ on the ownership attribution rules

My tax advisor told me the other companies I own are disregarded entities. Doesn’t that mean I can disregard them for my benefit plans also?

Actually, no. Even though certain companies may be disregarded for other tax or financial reporting purposes, there is no such exclusion in the context of the controlled group and affiliated service group rules. In other words, just because an entity may be disregarded for some purposes does not mean it can be disregarded for all purposes.

What is a controlled group?

Controlled groups are driven completely by overlapping ownership, and there are two types — the parent/subsidiary-controlled group and the brother/sister-controlled group.

  • Parent/subsidiary: Exists when one entity owns 80% or more of another entity, e.g. Company A owns at least 80% of Company B.
  • Brother/sister: Exists when the ownership structure meets two thresholds. 
    • Common Ownership: The same five or fewer individuals must own 80% or more of each company under consideration; and
    • Identical Ownership: The same five or fewer individuals from the previous step have identical ownership of more than 50%.

Common and identical ownership sound kinda like the same thing. Can you explain in more detail?

Common ownership is a little easier to explain, so we’ll start there. Basically, you start by identifying those people who have ownership in both companies. The sum of their ownership percentages is common ownership.

Identical ownership is a little trickier and is probably best explained using a short example. If Jane owns 10% of one company and 5% of another company, her identical ownership is the lowest common denominator among the two - 5%.


Click here to read a few examples provided by DWC - The 401(k) Experts.




Add comment