In today's business
climate, it seems it is becoming increasingly common for businesses
of all sizes to be structured using multiple companies. Maybe a
business person is pursuing multiple ventures with different groups
of co-owners. Perhaps a company decides to offer a new product or
service and that is best accomplished via a separate entity.
Sometimes it makes sense to create a separate company for each of a
business's locations. Still other times the owner of one company
decides to buy another business.
Regardless of the reason for structuring a business in this way,
there are some complex IRS rules that must be considered when it
comes to the retirement benefits being offered.
During the mid-1980s, Congress created a series of complex rules
designed to prevent companies from transferring employees to
separate but related companies as a way to provide reduced or even
no benefits without running afoul of the nondiscrimination rules.
Generally speaking, those rules describe two types of related
groups—the affiliated service group and the controlled group. For
the sake of brevity throughout the rest of this article, we will
occasionally refer to these as ASGs and CGs.
In short, these rules require that all companies in a related
group must be combined when performing annual nondiscrimination
testing on the retirement plan(s). While this requirement can be a
limitation at times, with some careful planning it can also be used
to provide retirement benefits to multiple companies more cost
effectively than if the related companies were treated as separate
entities. Before we look at some examples, it is first necessary to
dive a little bit into the weeds to understand the gist of the rules
Affiliated Service Group
The ASG rules focus on the nature of the relationship between the
entities in question. Some of the key variables in determining
whether an ASG exists include the following:
- Working Relationship: Does
one entity provide services to the other that are customarily
provided by the recipient's employees? Alternatively, do the
entities involved join together to provide services to the same
- Ownership: Is there any
common ownership among the entities? In some instances, as
little as 10% common ownership is enough to trigger an ASG.
- Management: Does one
entity provide management oversight over the other entity? If
so, an ASG may exist even if there is no common ownership.
While ASG relationships can exist in many different industries
and entity types, it is not unusual for them to occur in
professional settings such as medical practices and law firms.
Consider two examples illustrating relatively common professional
A law firm is organized as a partnership and each attorney
creates his or her own professional corporation (P.C.). Rather than
the attorneys being the partners of the law firm, their respective
P.C.s are the partners. The partnership and the individual P.C.s
join together to provide legal services to the firm's clients. As a
result, the firm and the P.C.s form an ASG.
Several physicians own a medical practice and they have no other
employees. However, they also own part of a billing office that
includes a number of employees who handle administrative functions
for the practice. Since the billing office provides services to the
practice that are customarily provided by employees, and there is
some overlapping ownership, the two potentially form an ASG.
The remainder of this article will focus primarily on controlled
groups. Unlike affiliated service groups, controlled group
determinations are based solely on overlapping ownership. There are
two general types of controlled groups—the parent/subsidiary group
and the brother/sister group.
Parent/Subsidiary Controlled Group
This type of group is the more straightforward of the two and
exists when one entity owns 80% or more of another entity. For
example, if Company A owns 80% or more
of Company B, the two companies are part of a parent/subsidiary
Brother/Sister Controlled Group
This type of group is a little more complicated to explain. In
broad terms, there are two thresholds to meet:
- Common Ownership: The same
five or fewer individuals must own at
least 80% of each company under consideration.
- Identical Ownership: The
sum of the identical ownership of the five or fewer owners from
the first step must be greater than
50%. The best way to explain identical ownership is via
an example. If John Doe owns 10% of one company and 5% of
another company, his identical ownership among the two is 5%.
When both of these requirements are met, there is a
brother/sister controlled group.
Attribution of Ownership
As we described above, ownership is a key variable in these
determinations, and there is a series of additional rules that
discuss ownership. Specifically, there are instances in which the
ownership held by one person or entity must be attributed to another
person or entity. While we will spare you the gory details, it is
important to briefly touch on these rules.
Attribution from Company to Individual
In simple terms, this essentially means that a person who owns at
least 50% of a business is deemed to own a proportionate share of
whatever that business owns. For example, if John Doe owns 75% of
ABC Company, and ABC owns 60% of XYZ Company, John is deemed to own
45% of XYZ (75% x 60%). There are a number of variations and
exceptions, but remember…we promised to spare you the gory details.
Attribution Among Family Members
This is when one person's ownership is attributed to certain
family members. Specifically, an individual's ownership is
attributed to his or her spouse as well as lineal ascendants and
descendants. In this case, we do need to journey a little further
down the rabbit hole to consider some of the very important
- Spousal attribution generally does not apply if the owner's
spouse does not hold direct ownership in his or her own right
and the spouse does not participate in the owner's company. The
spouse need not formally be an employee in order to
“participate” in the business.
- There is limited attribution between parents and children
over the age of 21, based on the amount of direct ownership held
by the child.
- There is no attribution between siblings.
Certain attribution to ascendants and descendants extends only to
one generation, while other times it extends to multiple
Putting it Together
Assuming you've made it this far without either falling asleep or
running screaming from the room, it's time to look at some examples
that might pull all of this craziness together. We will do this
using a couple of simplified case studies, and our cast of
characters will include John, Paul, George, Ringo, Yoko (John's
wife) and Julian (John and Yoko's 18-year-old son).
Case Study #1
Our characters hold the following ownership in two companies:
Yellow Sub, Inc.
At first glance, it does not appear that the same five people own
at least 80% of both companies. However, once we consider family
attribution, John's total ownership in Yellow Sub is 70% (30% direct
+20% attributed from Yoko +20% attributed from Julian). Together,
John and Paul own 80% of Beatlemania and 100% of Yellow Sub and
their identical ownership is greater than 50%, making the two
companies part of the same controlled group.
Case Study #2
John and Yoko each own 100% of Imagine, LLC and Silver Horse,
Inc., respectively, and neither one is at all involved in the
company owned by the other. Under one of the exceptions noted above,
their ownership would not be attributed to each other, so it appears
there would not be a controlled group. However, since Julian is
under the age of 21, he is attributed the ownership from each of his
parents, making him the 100% owner of both companies and causing the
two to form a controlled group.
Making Sense of it All
So, what does all of this really mean? Basically, it means that
when there is a controlled group (or an affiliated service group),
all of the related companies are treated as a single employer for
purposes of the retirement plan. In other words, the employees of
all the related companies must be included in the annual
nondiscrimination testing. That might sound onerous but it doesn't
have to be.
Keep in mind that the annual testing compares the benefits
provided to highly compensated employees (HCEs) to those provided to
non-HCEs. If two companies in the same controlled group have similar
numbers of HCEs and non-HCEs, it is completely plausible that the
tests would still pass even if the employees of one of the companies
don't receive any plan benefits.
If the goal is to provide similar benefits to the employees of
several companies, a controlled group/affiliated service group
relationship can make it more cost-effective to do so. The reason is
that since all of the companies in the group must be treated as a
single employer for purposes of testing, it is perfectly acceptable
to have a single plan covering all of the employees. Through the use
of more complex forms of nondiscrimination testing, it might even be
possible to provide different benefits to the various companies in
the group via a single plan. That means only one plan document to
maintain, only one plan to administer and only one Form 5500 to file
Before considering how to plan around/take advantage of related
group status, the first step is to be sure which companies are/are
not “related” based on the rules we have highlighted in this
article. There are many facts and circumstances that can affect
controlled group and affiliated service group determinations and
even seemingly slight nuances can be game changers. As a result, it
is usually worth spending a few dollars to hire someone who is
knowledgeable and experienced in this area to assist with the
With some due diligence and careful planning, your controlled
group can be under control rather than out of control.