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February 16, 2009

Controlled group

Your Guide

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Definition

Businesses that share common ownership. Depending on the percentage of ownership, companies under a controlled group ( common control) must be treated as one company for retirement plan purposes.

There are three types of controlled groups:

  • Parent-subsidiary , where the parent organization own at least 80 percent of the subsidiary organization. For purposes of the annual addition limit, the 80-percent requirement is reduced to an amount more than 50-percent.
  • Brother-sister controlled group, where (1) The same five or fewer persons own an aggregate of at least 80 percent of each business and (2) The individuals in number 1, must own more than 50 percent of each business. For this purpose, only identical ownership is considered. For instance, if Individual A owns 30 percent of ABC Company and 25 percent of XYZ Company, only 25 percent is counted for this requirement.
  • Combined group , where  a combination of parent-subsidiary control group and brother-sister control group exists.

Referring Cite

IRC § 414(b), IRC § 1563.

Additional Helpful Information

  • An attorney experienced in the area of ERISA should be consulted  to determine whether a controlled group exists amount companies with common ownership.
  • If there is no common control, it should still be reviewed to determine if an affiliated service group exists
  • For controlled group purposes, 403(b) plans are treated as if they are maintained by the individual- and not the employer
  • Chapter 7 Controlled and Affiliated Service Groups Overview  ( From the www.irs.gov). The following are excerpts from this document:
    • A brother-sister controlled 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 – 1.414(c)-2(b)(2) – generally means 80 percent or more of the stock of each corporation (but only if such common owner own stock in each corporation); and
      • Effective control – 1.414(c)-2(c)(2) – generally more than 50 percent of the stock of each corporation, but only to the extent such stock ownership is identical with respect to such corporation.

Example-Brother-Sister Ownership Test

Adams Corp and Bell Corp are owned by four shareholders, in the following percentages:

Percentage of Ownership

Shareholder

 Adams Corp

 Bell Corp

A

80%

20%

B

 10

50

C

5

15

D

5

15

 TOTAL

100%

100%

To meet the first part of the test in section 1563(a)(2)(A), the same five or fewer common owners must own more than 80% of stock or some interest in all members of the controlled group.

In this example, the four shareholders together own 80% or more of the stock of each corporation, the first test is met, since the shareholders own 100% percent of the stock.

50 Percent Test-Example

Shareholder

Identical Ownership Percentage in both Corps.

A

20%

B

10

C

5

D

5

 TOTAL

40%

.

To meet the second part of the test in Section 1563(a)(2)(B), the same five or fewer common owners must own more than 50% of each corporation, taking into account the stock ownership of each person only to the extent such stock ownership is identical with respect to each such corporation.

In this example, although the four shareholders together own 80% or more of the stock of each corporation, they do not own more than 50% of the stock of each corporation, taking into account only the identical ownership in each corporation as demonstrated above

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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