It is no secret that retirement plans for business owners can be incredibly tax advantageous for the business owners. These large tax savings have pushed the IRS and the Department of Labor to issue various guidelines to ensure that employees are being treated fairly while still encouraging retirement savings for employees, as well as the owners, through tax favored vehicles. Often times these guidelines can be complex when applied to certain situations. One of the most overlooked (especially for small business owners) is the Controlled Groups Provisions which the IRS established as part of the Revenue Act of 1964, and later updated with the Employee Retirement Income Security Act of 1974 (ERISA).

Looking at the big picture, the controlled group guidelines are intended to prevent business owners from using the benefits of a company sponsored retirement plan, while disregarding the company’s employees. Let’s look at this overly simplified example:

John owns a small business (we will call it Company A) with 20 employees. John wants to save money on taxes through a retirement plan but he doesn’t think he can afford to contribute for all of his employees as well. As a result, John sets up Company B as a consulting company. Company B has no employees. John establishes an Individual 401(k) (also called Solo 401(k)) for him and his spouse. John could potentially save as much as $55,000 (as of 2018) in his and his spouse’s plan, totaling $110,000 in contributions in one year. That could result in over $35,000 in tax savings. Sounds great, right?

Well, not so fast, that’s where Controlled Groups & Related Employers come into play. The IRS would view a situation like that as completely against the intent of the tax code. That’s why they put these guidelines in place. According to the controlled group guidelines, which we will briefly discuss below, Company A & Company B would be treated as one employer (a controlled group) for coverage testing. Since company A has employees, Company B is ineligible to have an Individual 401(k). Should Company B implement a traditional 401(k), Company A and its employees would need to be included in the non-discrimination testing ERISA guidelines.

What is a controlled group?

For qualified plans, a controlled group is defined as a combination of two or more corporations that are under common control. A controlled group relationship is deemed to exist if the businesses have a “parent-subsidy” relationship, a “brother-sister” relationship, or a combination of the two.

3 types of controlled groups



Exists when one or more companies are connected through stock ownership with a common corporation; and

-80% of the stock of each company, (except the common parent) is owned by one or more companies in the group; and

-The parent corporation must own 80% of at least one other company.


Parent-Subsidiary Example

Company P owns:

-90% of Company S

-60% of Company T

Unrelated persons own the remaining percentage of stock not owned by Company P

In this example, Company P in a parent-subsidiary group with Company S. Company T is not a member of the group because Company P’s ownership is less than 80%.

Further complexities arise when the subsidiary companies also own shares of other companies.



A Brother-Sister relationship exists if 5 or fewer “common owners” own, either directly or indirectly, a controlling interest of each group and have “effective control”.

-Controlling Interest: exists if the combined ownership of the common owners in each business equals 80% or more; and

-Effective Control: is deemed when the same 5 or fewer common owners has identical ownership of more than 50%. It is important to note that a common owner’s “identical ownership” is represented as the lowest percentage owned by that person in the various businesses being tested. For example, if Person A owns 75% of Company C and 50% of Company D, person A has identical ownership of 50%.

Brother-Sister Example:


ShareholderCompany XCompany Y


For the first part of the test, the four shareholders together own 80% or more of the stock in each corporation.  Now let’s look at the Identical Ownership Test. For reference, I have highlighted the percentages that are considered for Identical Ownership.

ShareholderIdentical Ownership in Company X & Company Y


In this example, the four owners have a combined ownership of more than 80%; however, they do not own more than 50% of the each corporation when taking into account only the identical ownership. As such, no controlled group exists.

Combined Group:

A combined group exists when a combination of parent-subsidiary group and brother-sister group exists. These are generally complex organizational structures.

Family Attribution Rules

This is where situations can potentially get very complex.


As a general rule, an individual is attributed any ownership interest held by the individual’s spouse. There is an exemption in which an individual is not attributed a spouse’s ownership interest in a business if all of the following conditions are met.

  • No direct ownership.
  • No participation in spouse’s business. The individual is not a director or employee, and does not participate in the management, of that company.
  • Limit on passive income. No more than 50% of the gross income of the business is from “passive investments”.
  • Disposition Restrictions. The spouse’s interest in the business is not subject to disposition restrictions that are in favor of the individual.

It must be noted that the above exception will not apply if either of the following scenarios hold true.

  • You live in a community property state
  • You have minor children (under the age of 21)

If you live in a community property state or you have minor children, the spouse‘s ownership is attributed to the individual and vis versa.

Children Over 21: If an individual’s child is over 21 years old, a limited attribution rule applies. The parent is only attributed an adult child’s ownership if the parent owns more than 50% of that business and the child owns a percentage in the same business.

Likewise, if a child owns more than 50% of a business and a parent has ownership in that business. The child is also attributed the parent’s ownership

What happens if the businesses are deemed a related employer?

If two or more companies are deemed related, the companies are treated as a single employer when applying the qualified plan requirements under the IRS guidelines. This includes the general qualification requirements, eligibility and coverage,, vesting, certain limitations, and the top-heavy rules.

It is important to review possibilities of a business’ controlled group status whenever considering implementing a qualified plan. Not only should you take into consideration various ownership, but also future plans of the various businesses. Proper planning can assist to make sure that your goals are accomplished while staying in line with IRS guidelines.