A controlled group consists of two or more companies with common ownership that must be treated as a single employer for 401(k) plan administration and nondiscrimination testing.
There are two primary types of controlled groups:
- Parent-Subsidiary Controlled Group: One company owns at least 80% of another business.
- Brother-Sister Controlled Group: Five or fewer individuals, estates, or trusts collectively own 80% or more of two or more businesses and have more than 50% identical ownership in those businesses.
If a business is part of a controlled group, the IRS requires that:
- All employees across the group must be included in nondiscrimination testing.
- Employer contributions and benefits are applied consistently across all companies.
- The group as a whole follows nondiscrimination and coverage testing rules to prevent favoring Highly Compensated Employees (HCEs).
Controlled group status must be accurately reported in the compliance questionnaire. Employers must provide:
- A list of all related companies in the controlled group.
- Ownership percentages and any changes from the prior year.
Proper classification helps ensure correct compliance testing results and employers avoid IRS penalties for failing to follow aggregation rules.
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