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A controlled group is two or more businesses linked by common ownership that the IRS treats as a single employer. Because the companies are combined, retirement plan testing, ACA employer mandate counts, and other benefit thresholds are measured across the entire group rather than company by company.
Controlled group rules come from Internal Revenue Code sections 414(b) and (c). The two main forms are parent-subsidiary groups, where one entity owns at least 80 percent of another, and brother-sister groups, where five or fewer individuals, estates, or trusts own at least 80 percent of each business and have more than 50 percent identical ownership across them. A related concept, the affiliated service group, sweeps in professional and service organizations that share ownership and work together even when the percentage tests are not met. Family attribution rules can pull in a spouse's or child's ownership, which surprises many owners.
The rules matter because single-employer treatment drives real obligations. Coverage and nondiscrimination testing for a 401(k) plan must consider employees of every group member, even those with no plan. Applicable large employer status under the ACA is determined by combining full-time and full-time-equivalent employees across the group. Health FSA and other benefit thresholds follow the same logic.
A frequent mistake is an owner with several LLCs who sets up a plan at only one entity and assumes the others are irrelevant. If the entities form a controlled group, excluding those employees can cause failed testing, corrective contributions, or plan disqualification, an outcome the IRS overview of 401(k) plans describes in terms of the qualification rules a plan must satisfy. Confirm ownership structure with counsel or your plan's advisor before adopting or amending a plan.
Start with the ownership chart. A parent-subsidiary group exists when one entity owns at least 80 percent of another. A brother-sister group exists when five or fewer people own at least 80 percent of each business with more than 50 percent identical ownership. Family attribution can add a spouse's or child's shares, so have counsel confirm.
Yes. Applicable large employer status is measured by combining full-time and full-time-equivalent employees across every member of the group, not company by company. Several small entities that would each fall below the threshold alone can together cross it, which brings offer-of-coverage and reporting duties to each employer in the group.
If the entities form a controlled group, leaving those employees out can cause coverage and nondiscrimination testing failures. Correction typically means corrective employer contributions, and in serious cases the plan's qualified status is at risk. Fixing it after the fact is far more expensive than confirming the ownership structure before you adopt or amend a plan.