Controlled Group Rules for Business Retirement Plans

Business owners often assume that each LLC, S corporation, or management company can sponsor a separate retirement plan for a selected group of employees. Sections 414(b), 414(c), and 414(m) can instead treat related employers as one employer for coverage, nondiscrimination, contribution, and other plan rules.

The analysis should be completed before a new entity adopts a plan or excludes employees. Correcting a failed plan after contributions are made is slower and more expensive than mapping the group first.

Parent-Subsidiary Controlled Groups

A parent-subsidiary controlled group generally exists when a common parent owns at least 80% of another trade or business and the ownership chain meets the statutory tests. The analysis can include corporations, partnerships, LLCs, sole proprietorships, and tax-exempt entities under the corresponding regulations.

Brother-Sister Controlled Groups

A brother-sister group examines common ownership by five or fewer individuals, estates, or trusts. The rules apply an 80% controlling-interest test and a more-than-50% effective-control test that counts identical ownership across entities. Simple cap-table percentages can be misleading because only overlapping ownership counts for the second test.

Affiliated Service Groups

Even when the controlled-group ownership tests are not met, an affiliated service group can combine service organizations that work together. Professional practices, management companies, and organizations regularly associated in providing services require particular attention.

Creating a management company with a different owner does not automatically isolate highly compensated employees or avoid plan testing. Service relationships, ownership, and management functions must all be reviewed.

Family Attribution

Ownership may be attributed among spouses, parents, children, grandchildren, estates, trusts, partnerships, and corporations. Exceptions can apply, but they are technical. A group chart should show both direct and attributed ownership before any conclusion is reached.

What Is Aggregated

When entities are treated as one employer, employees across the group may need to be considered for eligibility, coverage testing, nondiscrimination, top-heavy rules, contribution limits, and service credit. This does not necessarily require every entity to use an identical plan, but separate plans are tested within the aggregated employer framework.

Planning for a Multi-Entity Business

Prepare an ownership and service-relationship map, including spouses and trusts. List every employee, compensation, hours, and prior service. Coordinate the 401(k), profit-sharing, cash-balance, and welfare-benefit plans. Recheck the analysis after acquisitions, ownership transfers, marriages, divorces, or formation of new entities.

Worked Example: Practice and Management Company

A physician owns 100% of a medical practice with 18 employees and 100% of a management company that employs the physician and spouse. The management company adopts a cash-balance plan and attempts to cover only the two owners. Forming a second corporation does not make the practice employees disappear. Common ownership is likely to aggregate the entities, and the service relationship creates an additional affiliated-service-group issue.

The plan professionals must test eligibility, coverage, nondiscrimination, top-heavy status, and benefits using the aggregated employee census. A workable design may still produce a large owner deduction, but the cost includes required contributions for eligible staff and administration across the group.

A second entity can have valid operational reasons, such as centralized payroll, shared staff, or liability separation. Those reasons do not override Section 414. Plan design should follow the actual group rather than drive artificial ownership changes.

Frequently Asked Questions

Can each LLC have its own Solo 401(k)?

Not automatically. Related entities may be treated as one employer, and employees of the aggregated group may have to be considered.

Does 50/50 ownership avoid controlled-group rules?

Not necessarily. Brother-sister, attribution, and affiliated-service-group rules can apply depending on common ownership and service relationships.

Can a management company cover only the owners?

Possibly, but only if the aggregated-employer and nondiscrimination rules permit it. A separate entity alone does not isolate the plan.

Controlled Groups and Affiliated Service Groups: Retirement-Plan Rules for Multi-Entity Owners