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.
Understanding Controlled Groups
Under IRS Code sections 414(b) and (c), a controlled group is a group of companies that have shared ownership and, by meeting certain criteria, can combine their employee bases into one 401(k) plan. The controlled group rules were put into place to ensure that the plan provides proper coverage of employees and that it does not discriminate against non-highly compensated employees.
- Parent-Subsidiary Controlled Group: When one corporation owns at least an 80% interest in another corporation. The 80% ownership threshold is determined either by owning 80% of the total value of the corporation’s shares of stock or by owning enough stock to hold 80% of the voting power.
- Brother-Sister Controlled Group: 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 below, a brother-sister controlled group exists between Company A and Company B since the three owners together own more than 80% of Companies A and B, and their identical ownership is 75%.
| Owner | Company A | Company B | Identical Ownership |
| Mike | 15% | 15% | 15% |
| Tory | 40% | 50% | 40% |
| Megan | 40% | 20% | 20% |
| Total | 95% | 85% | 75% |
In this second example below, a brother-sister controlled group does not exist between Company A and Company B since the identical ownership is only 15%, well below the required 50% threshold.
| Owner | Company A | Company B | Company C | Identical Ownership |
| Jon | 100% | 15% | 15% | 15% |
| Sarah | 0% | 40% | 50% | 0% |
| Chris | 0% | 40% | 20% | 0% |
| Total | 100% | 95% | 85% | 15% |
- Combined Controlled Group: More complicated controlled group structures might involve a parent/subsidiary relationship as well as one or more brother/sister relationship. Three or more companies may constitute a combined controlled group if each is a member of a parent-subsidiary group or brother-sister group and one is:
- A common parent company included in a parent-subsidiary group and
- Is also included in a brother-sister group of companies.
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.
| Owner | Company A | Company B | Company C | Identical Ownership |
| Ariel | 80% | 85% | 80% | |
| Company B | 100% |
Controlled groups and 401(k) plans
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
Given the complexities associated with controlled group rules and how it may impact 401(k) plan administration, we encourage companies that have questions related to controlled groups to consult with their attorney or tax accountant, as Betterment is not a licensed tax advisor.
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