What are 401(k) Controlled Groups?

Do you own multiple businesses and offer 401(k) plans to your employees? Are you managing HR and employee benefits for a business that is one of several in the owner’s portfolio? I meet with many clients who fit these descriptions, and one topic I’m always sure to bring up with them is the 401(k) controlled group, a special provision that allows the owners of certain groups of multiple businesses to simplify their 401(k). The rules for controlled groups are tricky, and it’s easy to overlook important details if you don’t live and breathe retirement plans like I do.

Recently I saw a plan for the owner of several retail businesses who believed his businesses fit the controlled group definition. He wanted to add a new business to his existing 401(k) controlled group. When the business owner dug into the original 401(k) plan to do so, he discovered that a few of the businesses didn’t qualify to be part of that controlled group. In other words, businesses had been organized into a controlled group plan for years, even though they weren’t eligible for the designation.

Unfortunately, this happens all too often, and it’s a fairly costly mistake to fix. That’s why it’s so important to go through the details. In the end, the business owner found the right solution and corrected the issue, but at several thousand dollars of expense. Today the 401(k) plan meets regulations and supports the goals of both plan participants and the business. This experience only reinforces how important it is to address issues like this ahead of time, before mistakes are made.

If the conditions are right, controlled groups are a great way to help plan administrators save money and simplify the administration of what would otherwise be several different 401(k) plans. Let’s take a look at controlled groups, the benefits and potential challenges they may present, and what steps you can take to pursue the possibility of controlled group status for your businesses.

What is a 401(k) Control Group?

A controlled group is a group of companies that have shared ownership and, by meeting certain criteria, are eligible to combine their distinct employee bases into one 401(k) plan. Sometimes, I encounter clients who think they qualify for controlled group status based on this loose definition alone, and other times I see clients that probably do qualify but simply aren’t aware it’s an option.

Determining controlled group status can be straightforward in some cases, but can get more complicated when business ownership involves stocks, trusts, or estates.

Generally speaking, there are three arrangements that qualify as controlled groups for 401(k):

1. Parent/Subsidiary Businesses: The first one is pretty simple: A parent organization must own 80% or more of a subsidiary company in the same ownership structure. Let’s say a company that installs doors and windows decides to open a small subsidiary business that does interior design consulting. As long as the parent company owns at least 80% of their subsidiary interior design company, they’d qualify as a controlled group.
2. Brother/Sister Relationships: Here I’m not talking about companies literally owned by siblings, but about situations in which companies are controlled by the same person or group of people. There are two requirements for these kinds of businesses to qualify as a controlled group: First, a group of five or fewer must own at least 80% of the companies, and second, considering the extent to which ownership is identical among each company, the same group owns at least 50% of each company.
3. Combination: Some controlled groups are more complicated, and might involve a parent/subsidiary relationship and also one or more brother/sister relationship. These business groups may also qualify, but will need to meet both sets of requirements to be sure everything is in order.

The Pros and Cons of 401(k) Controlled Groups

What are the advantages and disadvantages of controlled groups?

I want to stress that the “cons” listed here may be challenging for some businesses, but they aren’t necessarily outright disadvantages. For instance, asking the human resources staff at one of your businesses to manage the 401(k) administration for everyone in the controlled group might be a big request for them to handle. But depending on your goals for your company-sponsored retirement benefits, the simplified administration and consolidated service provider fees may be well worth the effort to determine status and implement the controlled group model.

Determining Your Controlled Group Status

If you think your businesses might qualify for controlled group status, the first step is to talk to your service providers. Have one of them—maybe it’s your plan adviser, or your record keeper, or even your own legal team who knows your companies’ legal structures the best—review your situation and determine if you qualify or not. In more complicated situations, your provider might recommend teaming up with an attorney who is practiced in ERISA law to do a study analyzing your business structures up against the IRS rules for controlled groups. Either way, this is certainly a situation in which you’ll want to turn to experts.

From there, your provider will also be able to help you navigate your next steps, which could involve cleaning up a situation that wasn’t actually a controlled group, or moving to a controlled group approach, or keeping your current approach as-is.

Controlled groups can be a little complex, but I believe this is an important concept to introduce to anyone who might benefit from what they can offer in terms of lower costs and simplified administration. One thing’s for sure: If you own multiple businesses that all have or could use a 401(k) plan, it’s certainly worth investigating the possibility of uniting them all as a controlled group.