Our blog on Controlled Group rules – What you need to know is one of our most popular posts. This supplemental article digs a little deeper into the topic and provides some tools to help you determine whether you fall into a controlled group. As always, you’re welcome to contact us here at Benefit Resources if you’d like to discuss your situation with our pension consultants.
1. PARENT-SUBSIDIARY GROUP
This is the connection of companies through a chain of stock ownership. Under this relationship, the Parent Corporation owns at least 80% of the voting stock or stock value of the Subsidiary Corporation(s).
The relationship extends down the chain, so if Subsidiary A owns 80% of the stock of Subsidiary B, then Parent, Subsidiary A and Subsidiary B are all part of the controlled group.
2. BROTHER-SISTER GROUP
If the same five or fewer individuals own at least 80% of the corporation, then a brother-sister group exists. The term “individuals” extends to people, estates and trusts. “Effective control” of the companies comes into play with shareholders in this discussion as well. Five or fewer shareholders have effective control if they own more than 50% of the voting power or value of the stock of two corporations.
In determining whether or not a brother-sister group exists, take the following steps:
- Apply the attribution rules to determine who owns what. Putting a chart together is helpful for this purpose (see below).
- Disregard individuals who have no “effective control” of any of the companies.
- If the remaining shareholders own less than 80%, then there is no controlled group.
- If the same five or fewer individuals own more than 80%, and have effective control, then there is a controlled group.
Example:
|
Owner |
Alpha Co |
Beta Co |
Zeta Co |
Effective control |
|
Abby |
75% |
50% |
55% |
50% |
|
Betty |
24% |
20% |
10% |
10% |
|
Charley |
1% |
30% |
35% |
1% |
This table shows the ownership of three separate companies. The Effective Control is based on the company in which she owns the least amount of stock.
In this example, the three shareholders own 80% or more of the three companies, and they have 61% of the effective control. So a brother-sister controlled group exists.
3. FAMILY ATTRIBUTION
Stock ownership by family members can impact the determination of a controlled group
|
Ownership interest held by |
Ownership is attributed to |
Only applies if |
|
Child under age 21 |
Parent |
|
|
Parent |
Child under age 21 |
|
|
Child over age 21 |
Parent |
Parent owns more than 50% of that business |
|
Parent |
Child over age 21 |
If child owns more than 50% of that business |
|
Grandparent |
Grandchild |
Grandchild owns more than 50% of that business |
|
Grandchild |
Grandparent |
Only if grandparent owns more than 50% of that business |
|
Siblings |
No attribution applies |
|
4. WHO IS TREATED AS AN EMPLOYEE?
In general, there are several categories of individuals that are treated as employees of an employer. This is particularly important for this discussion, because employees of a controlled group or affiliated service group are all treated as being employed by a single employer. All of the following are considered employees for this purpose:
- Common law employees – those who receive a Form W-2 to report wages.
- Leased employees – those paid by a third party (e., PEO), but who perform services for the employer.
- Shared employees – Employees who may work for multiple employers who share a common location.
- Self-employed individuals – sole proprietors and partners who earn income from the business.
SUMMARY
It is critical to understand the controlled group rules when establishing a retirement plan for a company that may be involved in a controlled group. If you have questions or concerns about your situation, click here to arrange for a consultation with one of our pension consultants or check with an attorney specializing in ERISA regulations.
You may also like:
Controlled Group Rules - What you need to know
Affiliated Service Group Rules
How to set up a company retirement plan
Image courtesy of Stuart Miles / FreeDigitalPhotos.net
