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Controlled Groups: What Every Advisor Should Know

Why Controlled Group Rules Matter.

The controlled group rules exist to prevent business owners from dividing employees among multiple entities to avoid retirement plan requirements. If related businesses are considered a controlled group, they are generally treated as a single employer for many qualified plan purposes, including coverage testing, nondiscrimination testing, minimum participation requirements, and contribution and benefit limitations.

Without these rules, an employer could potentially provide generous retirement benefits to one group of employees, such as the highly compensated employees, while excluding all non-highly compensated employees who work for another company.

Because controlled group status can significantly affect plan administration, advisors should be alert whenever a client owns interests in multiple businesses.

The Two Primary Controlled Group Tests:

Parent-Subsidiary Controlled Groups.

A parent-subsidiary controlled group generally exists when one company owns at least 80% of another company.

Common examples include:

Parent-subsidiary example 1: Company A owns 80% of Company B.
Parent-subsidiary example 2: Company A owns 80% of Company B. Company A also owns 80% of Company C.
Parent-subsidiary example 3: Company A owns 80% of Company B. Company B owns 80% of Company C.

In all of the above, each company is part of a single controlled group with the other companies in each example.

Brother-Sister Controlled Groups.

A brother-sister controlled group exists when the same five or fewer individuals, estates, or trusts own multiple businesses and satisfy two ownership tests:

1. Together, they own at least 80% of each business; and
2. They have more than 50% identical ownership across the businesses.

The second requirement, identical ownership, is often the more challenging concept. In simple terms, an owner’s identical ownership is the lowest percentage they own in each company being tested, then added together. For example:

Because Adam and Ben collectively satisfy both the 80% and 50% tests, Companies A and B would generally be considered a controlled group.

Don’t Forget Family Attribution.

One of the most common surprises in controlled group analyses involves family attribution rules.

In many situations, the IRS treats an individual as owning interests held by certain family members. As a result, ownership may be attributed between spouses, parents and children, as well as grandparents and grandchildren.

This means a controlled group may exist even when ownership appears sufficiently separated on paper. While there are exceptions, family ownership should always prompt additional review.

Practical Tips for Advisors.

Controlled group issues often surface during new plan installations, annual compliance testing, or plan design discussions. Consider asking clients:

• Do you own part of another business?
• Do family members own related businesses?
• Have ownership percentages changed recently?
• Are employees working for more than one entity?

These simple questions can help uncover issues before they become compliance problems.

Reminders:

• July 31: Form 5500-series returns are generally due the last day of the seventh month after the plan year ends. A calendar-year plan’s 2025 Form 5500 is due July 31, 2026, unless extended by Form 5558.
• July 31: Form 8955-SSA (if required) is also generally due the last day of the seventh month after plan year-end. A calendar-year plan’s 2025 Form 8955-SSA is due July 31, 2026, unless extended by Form 5558.
• July 31: File Form 5558 extension request by July 31 to extend Form 5500-series and/or Form 8955-SSA to October 15, 2026.