Related Companies and Controlled Groups: What this means for 401(k) plans

When companies are related, how to administer 401(k) plans will depend on the exact relationship between companies and whether or not a controlled group is deemed to exist.

Updated November 20, 2024 • 4 min read

Betterment Editors

Under IRS Code sections 414(b) and (c), a controlled group is a group of companies or trades or businesses under common control that have shared ownership and, by meeting certain criteria, are treated as a single employer for certain retirement plan purposes. A controlled group does not necessarily have to maintain a single 401(k) plan. The controlled group rules generally require related employers to be treated as a single employer when applying certain retirement plan qualification requirements.

When one corporation owns at least an 80% interest in another corporation. For purposes of the controlled-group rules, the parent generally must own at least 80% of the other corporation's total voting power or at least 80% of the total value of its stock. The ownership can be direct or, subject to the applicable attribution rules, indirect.

When two or more entities are controlled by the same person or group of people, provided that the following criteria are met:

• Common ownership: Same five or fewer shareholders own at least an 80% controlling interest in each company.
• Identical ownership: The same five or fewer shareholders have an identical share of ownership among all companies which, in the aggregate, is more than 50%.

In this first example, a brother-sister controlled group exists between Company A and Company B because the same three owners collectively own at least 80% of each company, and their identical ownership is 75%, which is more than the required 50%.

In this second example, a brother-sister controlled group does not exist because the same five or fewer owners do not have more than 50% identical ownership in the companies. The identical ownership shown is only 15%.

A combined controlled group consists of three or more corporations, each of which is a member of either a parent-subsidiary group or a brother-sister group, and at least one corporation is both the common parent of a parent-subsidiary group and a member of a brother-sister group.

In the below example, we see that Company A and B are in a brother-sister controlled group as the common ownership for both are at least 80% and the identical ownership is greater than 50%. However, since Company B also owns 100% of Company C, there’s a parent-subsidiary controlled group, which results in a combined controlled group situation.

If related companies are determined to be part of a controlled group, then employers of that controlled group are considered a single employer for purposes of 401(k) plan administration.

So even if multiple 401(k) plans exist among the employers within a single controlled group, they must meet the requirements as if they were a single-employer for purposes of:

• Determining eligibility
• Determining HCEs
• ADP & ACP testing
• Coverage testing
• Top heavy testing
• Compensation and contribution limits
• Vesting determination
• Maximum contribution and benefit limits

Controlled-group rules are not the only rules that can require related businesses to be treated as a single employer. Affiliated service group rules under IRC §414(m) can also apply to certain businesses that provide services to one another or have certain management or ownership relationships. Because these rules can be complex, plan sponsors should consult their tax or legal advisor when determining whether related businesses must be treated as a single employer.

Because controlled-group and affiliated-service-group rules can be complex and can affect 401(k) plan administration, plan sponsors should consult with their attorney or tax advisor when determining whether related businesses must be treated as a single employer. Betterment does not provide tax or legal advice.