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Controlled Groups

Organizations Defined

IRC §414(c) states that "all employees of trades or businesses (whether or not incorporated) which are under common control shall be treated as employed by a single employer." IRC §1.414(c)-2 calls these trades or businesses "Organizations" and includes in that definition:

  1. a corporation
  2. a partnership
  3. a sole proprietorship
  4. a trust or estate

"Individual Owners" Defined

The "brother-sister" rules involve ownership by "persons" rather than corporations, partnerships, or sole pro-prietorships. The term "Persons" is used to include:

  1. Individuals
  2. Trusts
  3. Estates

If there is more than one beneficiary of a trust or estate, each beneficiary's actuarial interest will be considered. Such Interest is determined by using estate tax regulations.

Family Attribution Rules

Family attribution rules apply in determining ownership of individual interest.
Reg. §1.414(c)-4(b)(5) and (6) attribute ownership of the following individuals:

  1. A spouse's ownership in an organization is attributable unless all of the following conditions are met:
    • the individual does not directly own any part of the organization,
    • the individual is not a member of the board of directors, a fiduciary, an employee, or part of management,
    • no more than 50% of the gross income of the organization is derived from royalties, rents, dividends, interest and annuities, and
    • the spouse's interest in the organization is not restricted in how that interest may be disposed of and such conditions do not favor the individual or the individual's children under the age of 21.
  2. A minor child's interest, for a child under the age of 21, in an organization is considered to be owned by a parent even if the child's interest is only indirect ownership.
  3. A parent's interest in an organization is considered to be owned by a minor child.
  4. An adult individual is considered to own the interests of his parents, grandparents, grand-children, and children who have attained age 21 if said individual owns more than 50% of the organization.

These attribution rules do not apply to ownership by brothers and sisters.

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Effect on Retirement Plans

When a controlled group exists, the retirement plan of any member of the controlled group must take into account all of the employees of the controlled group in applying the provisions of the following sections of the code:

    • IRC §401 . . . . . . . Basic qualification rules
    • IRC §408(k) . . . . . The SEP rules
    • IRC §410 . . . . . . . Minimum participation
    • IRC §411 . . . . . . . Minimum vesting
    • IRC §415 . . . . . . . Benefit Limitations
    • IRC §416 . . . . . . . Top-Heavy plan rules

If a single plan is adopted by more than one of the firms of a controlled group, the following rules also apply to the plan:

    • IRC §404(a) . . . . . Employer deduction standards
    • IRC §412 . . . . . . . Minimum funding standards
    • IRC §4971 . . . . . . Excise Taxes

These sections are to be followed in allocation of costs and deductions to the various firms utilizing the plan.

I. Parent-Subsidiary Controlled Groups

Parent-subsidiary controlled groups involve ownership by organizations of other organizations. Ownership by individuals is not considered in this category. A Parent-subsidiary controlled group exists if: One organization (the parent) owns at least 80% of another organization (the subsidiary). In addition, if the subsidiary owns at least 80% of a third organization, that third organization is included in the parent-subsidiary controlled group.

More than 50% Situations
There are times when one organization owns less than 80% of another, but still owns more than 50%. While a controlled group does not exist for IRC Secs. 414(b), (c) and 1563 purposes, the benefit/contribution limits of IRC Sec 415 would still apply. IRC Sec 415(h) says that "more than 50%" should be substituted for "at least 80%" whenever the controlled group rules are being tested.

 

There are really only three possibilities involving the retirement plans of the organizations in an ownership situation:

    • 80% or more . . . . . . . . Secs. 401, 410, 411, etc. apply
    • >50% and <80% . . . . . Only Sec 415 applies
    • 50% or less . . . . . . . . . Nothing applies

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II. Brother-Sister Controlled Groups

Brother-sister controlled groups involve ownership by persons of two or more organizations. Ownership by another organization is not considered in this category.

A brother-sister controlled group exists if the same five or fewer persons own:

  1. At least 80% of each organization, and
  2. More than 50% of their ownership is identical within each organization

Brother-Sister Example

Five unrelated individuals own the following three companies in the following manner. Which companies have a controlled group situation?

Individual

Company A

Company B

Company C

F

5%

15%

0%

G

25%>

10%

30%

H

0%

35%

20%

I

50%

0%

25%

J

20%

40%

25%

A & B Test

Common
Ownership

Company A

Company B

50% Test

F

5%

15%

5%

G

25%

10%

10%

J

20%

40%

20%

  50% 65% 35%

A & C Test

Common
Ownership

Company A

Company B

50% Test

G

25%

30%>

25%

I 50% 25% 25%
J 20% 25% 20%
  95% 80% 70%

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B & C Test

Common
Ownership

Company A

Company B

50% Test

G

10%

30%

10%

H 35% 20% 20%

J

40%

25%

25%

  85% 75% 55%

   

Results

  1. A & B . . . . Fail both 80% and 50% Tests . . . . No Control
  2. A & C . . . . Pass both 80% and 50% tests . . .  Controlled
  3. B & C . . . . Fail 80% and pass 50% Tests . . . . No Control

III. Combinations of I and II

For a combination controlled group to exist, there must be three or more organizations that meet both of the following rules:

  1. each of the organizations is a member of either a parent-subsidiary or a
    brother-sister controlled group, and
  2. at least one organization is the common parent in the parent-subsidiary controlled group and a member of the brother-sister controlled group  

The flow of ownership would look like this:

Individuals ---------> brother-sister ---------> parent-subsidiary

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