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Case of the Week: Controlled Groups

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

  • The IRS defines a controlled group of businesses in Internal Revenue Code Section 414(b) and (c) as a combination of two or more businesses that are under common control within the meaning of Code Section 1563(a). “Businesses” include proprietorships, partnerships and corporations.

  • If a group of businesses is a “controlled group,” the IRS requires that all employees be treated as employed by a single employer for qualification requirements of Code Sections 401 (general qualifications), 408(k) (simplified employee pension or SEP plans), 408(p) (saving incentive match plan for employees or SIMPLE plans], 410 (minimum participation standards), 411 (minimum vesting standards), 415 (limits on benefits and contributions) and 416 (top-heavy determination).

  • A controlled group determination should only be made by a competent legal professional.

  • There are three types of controlled groups: (1) parent-subsidiary; (2) brother-sister; and (3) a combination of 1 and 2.

  • A parent-subsidiary controlled group exists when all three of the following conditions are satisfied:

    • 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



    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.


    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.

    Columbia Threadneedle Investments (Columbia Threadneedle) is the global brand name of the Columbia and Threadneedle group of companies.

    © 2015 Columbia Management Investment Advisers, LLC. Used with permission.