It is important for businesses that have common ownership to determine if the entities are members of a controlled group as defined by Code Sections 414(b) and (c). Separate legal entities that are members of a parent-subsidiary group or a brother-sister group are treated as one entity when applying various qualified retirement plan requirements such as the coverage, vesting, and nondiscrimination rules.
For example, if A and B, who are individuals, each own 40% of the stock of Company X and 40% of the profits interests in Company Y, the two entities, X and Y, would be a brother-sister control group. Any retirement plan that is sponsored by Company X would need to either demonstrate that the plan passes the Code Section 410(b) coverage test, taking into consideration all of the employees of both X and Y, or else allow the employees of Y to participate in X’s retirement plan, and list Y as a participating employer in Company X’s plan.
Also, X and Y would determine if they are a large employer under the Affordable Care Act by adding together all of their full-time equivalent employees. If X has 15 employees and Y has 120 employees, both X and Y would be part of a large employer group under the Affordable Care Act.
The rules for determining if a control group exists are complex. A parent-subsidiary control group exists if one corporation owns at least 80% of the stock of another corporation, or at least 80% of the profits or capital interests of a partnership or a limited liability company taxed as a partnership. A brother-sister group exists if five or fewer persons (including individuals, estates, or trusts) have a “controlling interest” in two or more entities, and the same persons, taking into consideration the ownership of each such person only to the extent that it is identical with respect to each such entity, have “effective control” of the entities. Controlling interest exists if the five persons own at least 80% of an entity’s stock or at least 80% of the profits or capital interests of a partnership or a limited liability company. Effective control exists if the five persons own more than 50% of the stock of a corporation or more than 50% of the profits interest or capital interest of a partnership or limited liability company. In addition, certain family members are deemed to own the stock or partnership interests of other family members. Other rules require that certain shares or interests in a partnership be disregarded when determining control group status.
For more information, please contact Deb Grace in our Troy, Mich. office at 248-433-7217.