Some of the major complexities of many qualified retirement plans result from the various subsidiaries and other entities that are part of the larger corporate parent. There are specific definitions within various regulatory provisions that need to be considered, including controlled group of corporations.
What Is a Controlled Group of Corporations?
A controlled group of corporations refers to a collection of corporations that are connected through certain relationships and therefore are treated as a single entity for tax purposes. The term "controlled group" is used by the Internal Revenue Service (IRS) to refer to a group of corporations that are related either through direct or indirect ownership. Specifically, a controlled group of corporations can include a parent corporation and its subsidiaries, as well as a group of corporations under common control by five or fewer individuals or entities. A controlled group exists if a parent-subsidiary or brother-sister group exists:
- Parent-Subsidiary: This controlled group exists when one or more entities are connected through common ownership by a parent of 80% or more. Any employees of these so-owned subsidiary entities are part of a controlled group of corporations and would be considered to be employees of one organization (the parent).
- Brother-Sister: This controlled group exists when two or more entities have five or fewer common owners having a controlling interest and effective control.
- Controlling interest: 80% or more ownership total among all owners
- Effective control: 50% or more ownership of each entity among all owners
What Impact Does This Have on My Retirement Plan?
- Highly Compensated Employees (HCEs): An HCE is a highly compensated employee if the employee meets one of the two tests: the five-percent owner test or the compensation ratio test.
While a certain employee may only have ownership in one entity but not in any other entity within the controlled group, he would still have to be included in the controlled group’s non-discrimination testing as an HCE as a result of the controlled group relationship.
- Compensation Limits: Compensation must be aggregated to not exceed the IRS limits.
- Coverage Requirements: A qualified plan must recognize service with all employers in a controlled group for purposes of meeting requirements of minimum coverage.
- Service: All years of service (assuming they meet the definition of a “year” per the Plan Document) with an employer must be counted. In a controlled group scenario, this means that all years of service with any employer considered part of that controlled group must be considered.
It is important to evaluate, with the help of legal counsel or your accounting firm, the ownership of any entities that may be a part of your organization’s structure. This will allow you to determine if you have a controlled group of corporations and will help to ensure compliance with the law. For more information, visit our benefit plan advising and auditing blogs. Contact your Meaden & Moore professional to discuss any questions you may have.