Whether it’s a parent subsidiary, a brother-sister controlled group, or a combination of the two, being a controlled group has an impact on qualified plan rules.

Introduction

The controlled group rules were adopted as part of the coverage and the nondiscrimination rules to insure that the plan(s) maintained by an employer do not discriminate in favor of highly compensated employees.  The rules provide guidance in connection with the definition of the employer for purposes of the plan(s) maintained by the employer.  The rules identify the ways in which separate employers are considered as one for purposes of a qualified plan.  For example, a controlled group of business entities can exist on the basis of ownership where one business owns a controlling interest in another business.  A controlled group can also exist where five or fewer individuals have an ownership interest in two or more other businesses.  A controlled group can also exist in the service industry where an element of control exists and two or more entities are regularly associated in providing services to third parties. The rules that follow are designed to identify who an employer's employees are for purposes of maintaining a qualified plan.

Controlled Group of Corporations - Code §414(b)

A controlled group of corporations includes a parent-subsidiary controlled group, a brother-sister controlled group or a combination of the two.

Partnerships, Proprietorships, Etc. Under Common Control - Code §414(c)

The statute provides that rules similar to those prescribed for a controlled group of corporations are applicable in connection with a controlled group of unincorporated businesses.

Parent-Subsidiary Group

Such a controlled group exists if one corporation owns a controlling interest in another corporation.  For example, if Company A owns 100% of the stock of Company B, a controlled group exists consisting of Companies A and B.  The situation is a bit more complex where a holding company exists and the ownership interest varies down the line.  A controlled group exists to the extent that one or more chains of organizations conducting trades or businesses connected through ownership of a controlling interest by a common parent organization.

Control is determined by the following two criteria:

• at least 80% of each entity's interest must be owned by the common parent or by one or more of the other businesses, and
• the common parent must own at least an 80% interest in one or more of the other organizations.

The 80% ownership threshold is determined either by owning stock with 80% of the voting power of all classes entitled to vote or 80% of the total value of all shares of all classes of stock. 

EXAMPLE 1:

Controlled Group 1 - Companies A, C, and D.

Controlled Group 2 - Companies B and E.

Brother-Sister Controlled Group

Two or more organizations are within a brother-sister group if:

• the same five or fewer shareholders, who are individuals, estates or trusts, own at least an 80% controlling interest in each company, and
• the same five or fewer shareholders have an identical ownership among all companies which, in the aggregate, is more than 50%. 

EXAMPLE 2

OWNERSHIP IN COMPANY

For example, if stockholder 1 owns 50% of Company A, 20% of B and 10% of C, his or her identical ownership in all three companies is 10%.  Stockholder 2 owns 25% of Company A, 20% of B and 15% of C resulting in an identical ownership of 15%.  In the aggregate, stockholders 1 and 2 have an identical ownership of 25%.

EXAMPLE 3

There is no controlled group among Companies A, B and C since the identical ownership is less than 50%.

There is a controlled group among Companies B and C since the three stockholders together own more than 80% of B and C and their identical ownership is greater than 50%.

Combined Group

Three or more corporations, each of which is a member of aparent/subsidiary or brother/sister group of corporations and one of which is:

• a common parent corporation included in a parent/subsidiary group and also

• is included in a brother/sister group of corporations.

EXAMPLE 4

An individual stockholder owns 80% of Corporation X and 85% of Corporation Y forming a brother-sister controlled group.  Y owns 100% of Corporation Z forming a parent-subsidiary controlled group.  Since Y is the parent in a parent-subsidiary group and is also part of a brother-sister group, a combined controlled group exists between X, Y and Z.

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