Common ownership of related organizations or companies may impact your retirement plan.
A Controlled Group and an Affiliated Service Group are related businesses that have common ownership. All businesses that are part of either one are considered "together" for certain plan requirements. For that reason, we need to know if your business has related organizations so we can guide you through potential impacts on your plan.
Controlled Groups
What Is a Controlled Group?
A Controlled Group is a collection of related businesses that are connected through common ownership. Because of this ownership link, the businesses are treated as a single entity for certain regulatory and compliance purposes, such as retirement plans and benefits.
Types of Controlled Groups
- Parent-Subsidiary: This occurs when a parent business owns 80% or more of a subsidiary business. There can be one subsidiary or multiple subsidiaries. There can also be multiple tiers of entities connected to a common parent. The parent company only needs to control any one of the subsidiaries.
- Brother-Sister: This occurs when the same five or fewer individuals own a controlling interest of 80% or more in the organization, and each of them also owns more than 50% of each brother and sister organization.
- Combined Controlled Group: This occurs when a group of three or more organizations are each a member of either a parent-subsidiary or brother-sister group. In addition, at least one organization is the common parent of a parent-subsidiary group and is also a member of a brother-sister group.
How Is "Ownership" Determined?
Many businesses that are part of a Controlled Group are owned by family members, and special rules exist that attribute an ownership interest to an individual because of their relationship to other owners.
Between Spouses: SECURE 2.0 brought changes to Controlled Groups and Affiliated Service Groups to allow family members to keep business separate under certain circumstances. Generally, a spouse is considered to be an owner except if all the following exceptions are met:
- An individual has no direct ownership interest in their spouse’s business;
- The individual does not participate in the management of the other spouse’s business and is not a director, officer, or employee of the spouse’s business;
- The business’s passive income (dividends, interest, rent, royalties, and annuities) is no more than 50% of its gross income; and
- The ownership in the business does not have any restrictions on the spouse’s disposition of the business that favor the individual or the children of the individual and the spouse under the age of 21.
Between Relatives: Ownership rights between relatives can be complex. The following chart is a short summary of the relevant tax code provisions.
| Ownership Interests Of | Are Attributed To | Only If |
| Minor Child | Parent | -- |
| Parent | Minor Child | -- |
| Parent | Adult Child | Adult child owns more than 50% of the business |
| Adult Child | Parent | Parent owns more than 50% of the business |
| Grandparent | Minor or Adult Child | Minor or adult child owns more than 50% of the business |
| Minor or Adult Child | Grandparent | Grandparent owns more than 50% of the business |
| Siblings | None | -- |
Note: An Adult Child is defined as age 21 or older. A Minor Child is defined as under the age of 21.
A Note About International Organizations
A foreign company may be part of a Controlled Group. Nonresident aliens are included when performing compliance testing for organizations that are part of the Controlled Group. For example, a foreign parent company could control subsidiaries that operate in the United States. The eligible employees for those subsidiaries would need to be considered part of a single employer for the applicable plan requirements.
What Is the Significance of Being Part of a Controlled Group?
All employees in all businesses that are part of the Controlled Group are treated as if one employer employs them. Therefore, all employees must be considered to determine the plan’s compliance with legal requirements, including general plan qualification requirements, coverage and nondiscrimination requirements, minimum participation and vesting standards, limitations on benefits and contributions, and top-heavy plan requirements.
Affiliated Service Groups
What Is an Affiliated Service Group?
An Affiliated Service Group is a group of businesses that, while not necessarily sharing the same ownership, work closely together and provide services to each other. Because of their relationship and the services they provide to one another, these businesses are treated as a single entity for certain regulatory purposes.
Even if a group of businesses does not meet the definition of a Controlled Group, it may still be considered an Affiliated Service Group. This occurs when the entities have some common ownership and perform services for each other. Like Controlled Groups, businesses that are part of an Affiliated Service Group are treated as though they are part of a combined entity for retirement plan purposes.
The evaluation of entity ownership, common business transactions, and services provided can be extremely complicated. The rules were designed to prevent employers from segregating their workforce between entities that work together but structured to avoid the minimum percentage threshold levels required to become a Controlled Group. Two or more organizations can be part of an Affiliated Service Group if one provides services and a second (which owns an interest in the first) provides services either to this entity or with this entity to a third party.