Entrepreneurs often own more than one company. A physician may own a practice and a separate management company. A founder may start a second venture while keeping the first. A married couple may each own a business. When it comes to retirement plans, the IRS may treat some of these related businesses as a single employer.
That concept is called a controlled group. It can affect who must be covered by a 401(k), how nondiscrimination tests are run, and how contribution limits are applied. This guide explains how controlled groups form, what they change, and the questions owners can raise with their plan administrator and tax professionals.
What Is a Controlled Group?
Under the Internal Revenue Code, businesses with enough common ownership are treated as one employer for many retirement plan rules. The purpose is to stop an owner from offering a generous plan in one company while leaving employees of a related company out.
If your businesses form a controlled group, employees of every company in the group generally count when the plan is tested, even if only one company sponsors the 401(k).
How Controlled Groups Form
The rules are technical, and the details are worth reviewing with an ERISA attorney or a qualified plan administrator. At a high level, there are a few main types.
Parent-Subsidiary Groups
One business owns at least 80% of another business. A chain of companies can be linked this way.
Brother-Sister Groups
The same five or fewer people own at least 80% of two or more businesses, and they also have more than 50% identical ownership across those businesses when each person's smallest share is counted.
Combined Groups
A combination of parent-subsidiary and brother-sister relationships can create a larger group.
Affiliated Service Groups
Separate rules can link service businesses, such as medical, legal, or consulting firms, that work together or share ownership, even when the ownership percentages above are not met.
Family Attribution Rules
Ownership is not limited to shares in your own name. Under attribution rules, you may be treated as owning shares held by certain family members.
Spouses: A spouse's ownership may be attributed to you, with limited exceptions.
Minor children: Ownership by children under age 21 may be attributed to a parent.
Adult children, parents, and grandchildren: Attribution can apply in some situations, particularly when an individual already owns more than 50% of a business.
Entities and trusts: Shares held by partnerships, corporations, estates, or trusts may be attributed to their owners or beneficiaries.
A California Consideration
California is a community property state. Depending on how a business was acquired and funded, a spouse may have an ownership interest under state law, which can affect attribution analysis. This is one reason couples who each own a business may want a professional review.
What a Controlled Group Affects
Once businesses are part of a controlled group, several retirement plan rules apply across the group.
Coverage testing: The plan must cover enough non-highly compensated employees across all companies in the group, not just the sponsoring company.
Nondiscrimination testing: Contribution and benefit tests consider employees of the entire group.
Contribution limits: Annual limits apply on a combined basis across plans maintained by members of the group, so an owner cannot simply double up by sponsoring a plan in each company.
Top-heavy testing: Balances may be tested across the group.
Plan design: Eligibility rules and contribution formulas may need to account for every company's workforce.
Situations That Can Create a Controlled Group
Owners sometimes form a controlled group without realizing it. Common examples include:
Starting a second business: A new company with the same owners as an existing one.
Spouses who each own a company: Attribution may link the businesses.
Acquisitions: Buying another company can bring its employees into the analysis.
Management companies: A separate entity that provides services to an operating business.
Solo 401(k) plans: An owner with a one-person plan in one company and employees in a related company may have a coverage problem.
What Happens After an Acquisition
When a business is bought or sold, a transition period may apply. Under this rule, coverage testing can generally be delayed until the end of the plan year following the year of the transaction, as long as certain conditions are met. That window can give owners time to decide whether to merge plans, keep separate plans, or change plan design.
Plan Design Options Within a Controlled Group
A controlled group does not mean every company must offer identical benefits. Depending on the facts, owners may discuss:
One plan for the whole group: A single 401(k) covering employees of all companies.
Separate plans: Different plans for different companies, tested together.
Different contribution formulas: Some designs allow different employer contributions for different groups of employees, subject to testing.
Pairing with other plans: Some owners consider adding a cash balance plan, which has its own testing and funding rules.
Each option has administrative costs and testing requirements. A third-party administrator can run projections to show how different designs may perform under the tests.
Questions to Raise With Your Plan Administrator
Before adopting a new plan or forming a new entity, owners can bring a short list of questions to their administrator and CPA:
Ownership map: Who owns each business, directly and through trusts, entities, or family members?
Group status: Do any of the businesses form a controlled group or an affiliated service group?
Testing impact: How would employees of each company affect coverage and nondiscrimination results?
Limits: How do annual limits apply if more than one plan is maintained?
Future changes: How would a planned acquisition, new partner, or sale change the analysis?
Writing down the answers and revisiting them each year can make it easier to spot changes early.
Why Getting It Right Matters
If a controlled group is missed, a plan can fail coverage or nondiscrimination tests. Correcting that may require additional employer contributions for excluded employees, plan amendments, or use of IRS correction programs. Reviewing ownership whenever a new entity is formed or acquired can help owners address issues before they grow.
How Auric Supports Business Owners With Retirement Planning
Auric Capital Partners works with business owners from liquidity events to retirement planning. Its self-employed retirement services focus on helping independent professionals and entrepreneurs create retirement solutions that fit their cash flow and business structure. When multiple companies are involved, that work is coordinated with the owner's CPA, ERISA counsel, and plan administrator, who handle the legal and testing analysis.
The goal is to connect retirement plan decisions with the owner's broader picture, including taxes, investments, and an eventual exit. Learn more about us.
Let's Connect
If you own more than one business and want to understand how your retirement plan choices fit together, we would be glad to talk. Reach out to Auric Capital Partners to start the conversation.
Frequently Asked Questions
What is a controlled group for 401(k) purposes?
A controlled group is a set of businesses with enough common ownership that the IRS treats them as one employer for many retirement plan rules, including coverage, nondiscrimination testing, and contribution limits.
Can I have a solo 401(k) if I own another business with employees?
It depends. If the two businesses form a controlled group, employees of the other business may need to be considered, which can affect whether a one-person plan works. A plan administrator can review the facts.
Does my spouse's business count toward a controlled group?
It can. Family attribution rules may treat you as owning your spouse's shares, with limited exceptions. Community property rules in California can also be relevant.
What happens if I miss a controlled group?
The plan may fail required tests. Corrections can include additional contributions for affected employees, plan amendments, or use of IRS correction programs.
Can companies in a controlled group have different retirement plans?
Often, yes. Separate plans are possible, but they are generally tested together, so the combined design has to meet the rules.
This content is for educational and informational purposes only and should not be considered investment, tax, or legal advice. It is not a recommendation to buy or sell any security or to adopt any particular investment strategy. Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results, and no strategy can guarantee a profit or protect against loss. Please consult with a qualified professional about your individual situation. Registered Representative of Sanctuary Securities Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory services offered through Sanctuary Advisors, LLC., a SEC Registered Investment Adviser. Auric Capital Partners is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC.
