Common ownership of related organizations may impact your retirement plan
A Controlled Group and 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 that we can guide you about the potential impact that may have on your plan.
Types of Controlled Groups
- Parent-Subsidiary: A parent business that 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: The same five or fewer persons 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: A group of three or more organizations where each one is a member of either a parent-subsidiary or brother-sister group, and 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: There is no attribution between spouses if there is: a) no direct ownership or participation in the management of such corporation at any time during the taxable year; b) the spouse is not a member of the board of directors, a fiduciary, or an employee of such organization at any time during such taxable year; and c) no more than 50% of business gross income is from passive investments.
- Between relatives: Ownership rights can be complex. The following is a short summary of the relevant tax code provisions.
A note about international organizations
A foreign company can be part of a Controlled Group. Nonresident aliens included when performing compliance testing for organizations 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.
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
Even if a group of businesses does not meet the definition of a "Controlled Group," it may still be considered an "Affiliated Service Group" where 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.