The ERISA consultants at the Learning Center Resource Desk, which is available through Columbia Threadneedle Investments, regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in Connecticut is representative of a common inquiry involving the IRS rules regarding controlled groups. The advisor asked:
“What is a parent-subsidiary controlled group of businesses, and why is it important to know if a controlled group exists?”
Highlights of Discussion
- One or more companies are connected through stock ownership with a common parent company
- One or more companies in the group (except the parent) own 80% of the stock of each corporation
- The parent company owns 80% of at least one other corporation
Example
In this example, unrelated persons own the other shares of Red, Green and Blue that are not owned by Black. Black owns 80% or more of the stock of Red and Green. Therefore, Black is the common parent of a parent-subsidiary group consisting of Black, Red and Green. Blue is not a member of the controlled group because Black owns less than 80% of that company.
Conclusion
The IRS controlled group rules affect employer-sponsored retirement plans in a number of ways. To start, employees of a controlled group of businesses are treated as employed by one entity, which has implications for applying qualification requirements of the tax code. Because an accurate controlled group determination is critical, businesses should rely on their legal advisors to make such analyses.
The Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC (RLC), a third-party industry consultant that is not affiliated with Columbia Threadneedle. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Threadneedle does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.
Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Threadneedle.
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