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Why is it Important to Recognize Control Groups When Sponsoring ERISA Plans?

Matthew Arey, JD* – Partner, Director of Fiduciary Services, Retirement Advisor
March 2025

Understanding control group issues is critically important to an organization’s proper management of employee benefit plans including:

  1. Retirement plans (401(k)s, 403(b)s, Cash Balance Plans, Pensions, SIMPLE IRAs, SEP IRAs and other types of qualified retirement plans); and
  2. Employee health and welfare plans.

The proper documentation of control groups impacts the major compliance areas of retirement plans, including:

  1. Nondiscrimination testing;
  2. Compensation dollar limits;
  3. Participation;
  4. Eligibility;
  5. Coverage;
  6. Vesting;
  7. 415 limits; and
  8. Top Heavy.

Background

Control groups were first included in the tax code in 1964 and incorporated in the Employee Retirement Income Security Act of 1974 through sections 414(b) and ©. Section 1563(a) provides elaborate ownership rules to determine whether a control group exists. Additionally, in 1980 Congress added the Affiliated Service Group rules to stem what it believed to be abuses of corporate form to strictly comply with control group rules. 

What happens if my organization is part of a control group or an affiliated service group?

If a group of companies is found to be a control group or an affiliated service group, the IRS requires qualified plan testing and other ERISA provisions apply to all members of the control group. The rules treat those member organizations as a single employer.  Annual testing must be completed in aggregate, and this can have adverse impacts on the organization and blind-side well-meaning finance and human resources teams.

What is a control group?

Control groups are made up of two broad categories:

  1. Parent-subsidiary relationships; and
  2. Brother-Sister companies.

A parent-subsidiary relationship is defined as a corporation owning 80% or more of the voting shares of the subsidiary corporation. While one might suppose that corporations are the only business entities subject to control group analysis, section 414© applies to non-incorporated businesses including and not limited to partnerships and proprietorships. Virtually any business association owning 80% or more of a subsidiary organization is going to be deemed a control group of corporations. Additionally, for non-profit entities, if 80% or more of directors or trustees of one organization are representatives of or directly or indirectly controlled by another organization, then those organizations make up a control group.

A brother-sister control group is a group of two or more corporations, in which five or fewer common owners (a common owner must be an individual, a trust, or an estate) own directly or indirectly a controlling interest of each group and have “effective control”.

  • Controlling interest generally means 80% or more of the stock of each corporation (but only if such common owner owns stock in each corporation); and
  • Effective control generally means more than 50% of the stock of each corporation but only to the extent such stock ownership is identical with respect to such corporation.

The technical underlying business entity formation impacts the control group analysis especially for determining ownership percentages. In general, a trust or estate is the actual interest, a partnership is based on capital or profits, and a corporation is the voting stock or the value of stock.

Additionally, control group analysis is impacted by attribution rules. Attribution rules can mitigate or assign additional interest to certain closely related individuals like:

  1. Spouses;
  2. Minor children;
  3. Parents;
  4. Adult children; and
  5. Grandparents.

Attribution rules’ impact on control group analysis is complex and beyond the scope of this article. Being aware that attributed ownership can create complex entity ownership structures will help one navigate the impact on retirement plans.

Conclusion

Control group determinations are a complex and intricate analysis. Many companies operate completely unaware of their membership in a control group. There are ways to fix control group issues, if you have questions please reach out to your L&H service team who can point you toward the right professional to assist.

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Sources/Notes

  1. Controlled and Affiliated Service Groups, Ch. 7–1
  2. 26 USCS 1563(a)
  3. 26 USCS 401(k), 408℗, 410, 411, 415, and 416. Impacting generally: nondiscrimination, compensation dollar limits; minimum participation; eligibility; coverage; vesting; Section 415 limits; top heavy rules SEP, SIMPLE IRAs. 
  4. The underlying corporate form i.e. c‑corp, s‑corp, partnership, limited liability company (LLC) may impact the analysis. Complex property interests must be evaluated by a qualified tax or legal professional. 
  5. 26 USCS 414©
  6. A spousal exemption may apply in limited circumstances. 
  7. Attribution rules can apply to more than one individual.

*Although licensed to practice law, Matthew does not provide legal services for clients. Attorney-Client privilege does not apply to communications. Lebel & Harriman is not a law firm. The information contained in this communication, including its attachments, is not protected information and may be subject to disclosure to the full extent of the law.

This document is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

Securities Disclosure: Securities offered through Valmark Securities, Inc. Member FINRA, SIPC. Investment Advisory Services offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor. | 130 Springside Drive, Suite 300, Akron, OH 44333–2431 | Telephone: (800) 765‑5201 | Lebel & Harriman, LLP and Lebel & Harriman Retirement Advisors are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc.

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