The Basics of Controlled Group 401(k) Plans

Employers that match 401(k) contributions by employees often have an easier time hiring and retaining key talent. Entrepreneurs with controlling or significant ownership interests in more than one company or trade might have a difficult time keeping track of the 401(k) plan for each business. If, however, the associated companies pass one of four complex ownership tests, the owner(s) may offer all employees the same 401(k) plan. 

This collection of associated companies is called a controlled group under IRS rules. This tool can make life simpler for plan sponsors. However, one of four tests must be satisfied for a proper controlled group. The tests are as follows: 

  • Subsidiary-parent controlled group. Arguably the simplest, the parent company may offer the same 401(k) plan to employees of a subsidiary company as long as the parent company owns at least 80 percent of the subsidiary. 
  • Sister-brother controlled group. Common owners can band together to make a controlled group if they own enough of each company. Either two (and only two) owners must own at least 50 percent of each company in the controlled group OR no more than five owners must own at least 80 percent of companies within each group. 
  • Combined controlled group. Groups which have either subsidiary-parent or sibling controlled groups (multiple) AND a common company in at least two of those groups may form a combined controlled group. 
  • Attributed ownership controlled group. Close family members (parents, spouses, children, and grandchildren) might be considered part of a controlled group. The rules are different depending on the age of the family member and relationship with the plan sponsor.

The Benefits Are Numerous for Controlled Group Sponsors

Besides providing a single 401(k) plan for employees of different companies, plan sponsors will likely save costs by having a controlled group. The fees can add up quickly with just one plan. Having a controlled group can also maximize startup credits available to some small businesses. 

One more benefit of having a controlled group is that you have more investment opportunities. Clearing the minimum investment threshold is hardly ever a problem with controlled groups. 

There Are Some Drawbacks

The recordkeeping requirements for controlled group plans can be a little more cumbersome, relatively speaking. While all 401(k) plans are subject to periodic testing, controlled group plans are usually subject to more stringent (and frequent) testing. Don’t forget about non-discrimination testing, either!

Conclusion

It’s often said that no good deed goes unpunished. Business owners understand what this means when they attempt to offer matching 401(k) plans to employees but get tripped up by the countless details. Our firm is happy to help you make sure you’re in compliance as a 401(k) plan sponsor. If you think a controlled group plan is right for you or you might already be fulfilling the requirements without previously realizing it, we’d love to help. Contact your new trusted advisor today

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The Law Offices of Tyler Q. Dahl

At the Law Offices of Tyler Q. Dahl, we’re not just a law firm. We’re your trusted advisor for your business and family from beginning to end. As your family and business grow, we will be there by your side. Our passion is providing you with peace of mind and protection through personalized estate and business planning. Attorney Tyler Q. Dahl is one of less than 100 attorneys in the nation who is also a Certified Tax Coach.

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