Many employers have complicated corporate structures. These may include subsidiaries, holding companies, brother-sister corporations, or a related service group. Consequently, certain corporate structures may directly affect an employer’s 401k plan.
The Internal Revenue Code provides that all employees of all employers that are part of the same “controlled group” of corporations be treated as employees of a single employer.
The most common issue that exists as a result of this rule is that all employees of all employers that are deemed part of a controlled group must be included in nondiscrimination testing and coverage tests, even if those employees are not participating in the plan.
A “controlled group” exists if a certain parent-subsidiary or brother-sister group exists.
A parent-subsidiary controlled group exists if the corporations are connected with at least 80% stock ownership.
A brother-sister controlled group exists if:
- five or fewer people own at least 80% of the stock value or voting power of each corporation, and
- the same five (or less) people together own more than 50% of the stock value or voting power of each corporation, taking into account the ownership of each of these people only to the extent their ownership is identical with respect to each corporation.
Example: Corp A owns 100% of Corp B, 80% of Corp C, and 70% of Corp D. The remaining ownership of each company is held by unrelated persons.
In this scenario Corp A, Corp B, and Corp C are members of a controlled group, but Corp D is not because Corp A owns less than 80% of Corp D.
For corporate structures that contain a chain ownership of multiple companies and individuals, complicated attribution rules may apply. It is possible that a company may be considered part of an “affiliated service group” (which may also affect a 401k plan) if separate organizations provide services to one another and certain ownership rules are met.
If you have questions regarding your corporate structure and how it may affect your 401k plan, please contact us.Related Topics
- controlled group 401k, affiliated service group 401k, 401k controlled group, control group 401k, 401k controlled group testing